For debt-to-equity swaps that occur outside of bankruptcy (often called out-of-court restructurings or private exchanges), there is no single governing U.S. statute. Instead, these transactions are governed by a stack of legal regimes, with state law and contract law at the core. Below is the practical legal framework used in the U.S.

 

1. State Corporate Law (Primary Governing Law)

State corporate law governs the equity side of the swap.
For most U.S. companies, this is:

• Delaware General Corporation Law (DGCL) (if the company is Delaware-incorporated)
   

Key corporate-law issues include:

• Authority to issue new shares
   

• Board approval requirements
   

• Stockholder approval (if required)
   

• Preemptive rights
   

• Classes, preferences, and conversion ratios
   

• Fiduciary duties of directors (especially in financial distress)
   

📌 In distressed but solvent or near-insolvent situations, boards must carefully balance fiduciary duties owed to shareholders and creditors.

 

2. Contract Law (Debt Instruments Control the Swap)

The debt documents control whether and how a conversion can happen.

This includes:

• Credit agreements
   

• Indentures
   

• Convertible note terms
   

• Intercreditor agreements
   

Most are governed by:

• New York law (by far the most common)
   

• Occasionally Delaware or another state
   

Contract law governs:

• Whether conversion is permitted
   

• Required lender or bondholder consent thresholds
   

• Anti-impairment clauses
   

• Amendment mechanics
   

• Exchange offers vs. mandatory conversions
   

📌 If the debt does not already permit conversion, you generally need unanimous or supermajority creditor consent.

 

3. Federal Securities Law

Issuing equity in exchange for debt is a securities transaction.

Governing statutes:

• Securities Act of 1933
   

• Securities Exchange Act of 1934
   

Key implications:

• Shares issued must be registered or exempt
   

• Common exemptions:
   

  • Section 4(a)(2) (private placement)
     

  • Regulation D
     

  • Section 3(a)(9) (exchange with existing security holders)
     

• Disclosure obligations (especially for public companies)
   

• Anti-fraud rules (Rule 10b-5)
   

📌 Section 3(a)(9) is frequently used for out-of-court debt-for-equity exchanges because it avoids registration if structured properly.

 

4. Trust Indenture Act of 1939 (If Public Bonds Are Involved)

If the debt is publicly issued bonds under a qualified indenture:

• The Trust Indenture Act (TIA) may prohibit impairment of payment terms without unanimous consent
   

• This can severely limit out-of-court swaps involving bonds
   

• One reason many companies choose Chapter 11 instead
   

📌 The TIA is often the biggest legal obstacle to non-bankruptcy debt-equity swaps.

 

5. State Fraudulent Transfer Law

Debt-to-equity swaps must provide reasonably equivalent value, or they risk later challenge.

Sources:

• State fraudulent transfer statutes (often based on the Uniform Voidable Transactions Act)
   

• Creditor remedies if the company later becomes insolvent
   

📌 This risk is why valuation and fairness opinions matter.

 

6. Tax Law (Structuring Constraint, Not Governing Law)

Federal tax law affects:

• Cancellation of indebtedness (COD) income
   

• Debt modification rules
   

• Basis and holding period of issued equity
   

While not governing legality, tax consequences strongly influence structure.

 

7. Governing Law Clause (Critical in Practice)

Every non-bankruptcy debt-to-equity swap is anchored by:

• The governing law clause in the debt documents
   

• The state of incorporation for equity issuance
   

Most common combination:

• New York law → debt & contracts
   

• Delaware law → corporate actions & equity
   

 

⚖️ Summary Table

Aspect

Governing Law

Equity issuance

State corporate law (usually Delaware)

Debt modification/conversion

Contract law (usually New York)

Investor protections

Federal securities law

Public bonds

Trust Indenture Act

Creditor protection

State fraudulent transfer law

Tax treatment

Internal Revenue Code

Overall transaction

No single statute—layered legal framework

 

Bottom Line

Outside bankruptcy, debt-to-equity swaps are governed primarily by state corporate law + contract law, constrained by federal securities law and (often) the Trust Indenture Act.

Here’s how debt-to-equity swaps / conversions for financially distressed companies are governed under U.S. law — especially where there’s bankruptcy or distressed restructuring:

 

📌 1. U.S. Bankruptcy Code — the Primary Legal Framework

Title 11 of the U.S. Code (Bankruptcy Code)

The Bankruptcy Code is the principal U.S. statute used for debt restructurings involving distressed companies that enter federal bankruptcy proceedings. It doesn’t have a single section labeled “debt-to-equity swap,” but the practice is embedded in the Chapter 11 reorganization process:

Key provisions:

• 11 U.S.C. Chapter 11 – Reorganization
   

  • Governs how insolvent businesses can reorganize and restructure their obligations under court supervision. Under Chapter 11, a distressed company proposes a plan of reorganization that may include converting debt into equity as part of creditor treatment and restructuring of capital structures. The plan must comply with statutory requirements such as classification of claims/interests (11 U.S.C. §§ 1122–1123) and confirmation standards (11 U.S.C. § 1129). Once confirmed, the plan may discharge prepetition debts and implement debt conversion or reduction mechanisms.
     

• Cramdown and “fair and equitable” standards
   

  • Under § 1129(b), even if a class of creditors objects, a plan can be confirmed over that objection if it is fair and equitable and does not discriminate unfairly. These standards allow a bankruptcy judge to approve a plan that effects a debt-for-equity conversion that restructures creditor and equity holder interests in a distressed reorganizing company.
     

• Definitions and procedural rules
   

  • The Code defines key terms like “claim” and “debt” (§ 101) and provides the bankruptcy court with jurisdiction to oversee the entire restructuring process.
     

In practice:
A debt-to-equity swap in bankruptcy is usually implemented through the Chapter 11 plan confirmation process, where creditors receive new equity (shares/ownership) in exchange for cancellation or modification of their claims.

 

📌 2. U.S. Corporate Law (State Law) — Governing Issuance of Shares

Even outside bankruptcy, debt-to-equity swaps involve corporate law requirements because they entail issuing equity:

• State corporate statutes (e.g., Delaware General Corporation Law)
   

  • Corporations must have authority under their governing state law (commonly Delaware’s Title 8) and bylaws to issue new shares and restructure capital. These statutes define how shares are authorized, rights of existing shareholders, and voting requirements for equity issuance.
     

  • Typical provisions require board and sometimes shareholder approval before issuing shares in exchange for consideration such as debt cancellation.
     

 

📌 3. U.S. Federal Securities Laws

When debt is converted into equity that will trade publicly or is offered broadly:

• Securities Act of 1933
   

  • New shares issued in a debt conversion must comply with federal securities registration or qualify for an exemption. The 1933 Act governs the offer and sale of equity and generally requires registration unless an exemption applies.
     

• Trust Indenture Act (TIA)
   

  • Governs debt securities and can impose requirements when modifying existing debt instruments subject to indentures — which can interplay with debt-equity restructuring.
     

 

📌 4. Other Relevant Federal Considerations

• Bankruptcy Rules and Procedures
   

  • Federal Rules of Bankruptcy Procedure guide notices, creditor voting, disclosure statements, and plan solicitation related to restructuring transactions.
     

• Corporate governance / fiduciary duties
   

  • Directors and officers must satisfy fiduciary duties under state law when approving restructurings that affect equity and creditor rights.
     

• Tax law
   

  • Converting debt to equity can have tax consequences under the Internal Revenue Code (e.g., cancellation of indebtedness income), influencing how transactions are structured.
     

 

📌 5. Specialized Statutes (Limited Scope)

There is one unrelated federal statute that uses the term “debt-for-equity swap” in a niche context:

• 22 U.S.C. § 5414 – Debt-for-Equity Swaps and Other Special Techniques
   

  • This section authorizes certain actions relating to debt restructuring for government-to-government obligations (e.g., commercial and government debt of Eastern European countries) and is not applicable to typical corporate restructurings in the U.S. private sector.
     

 

⚖️ Summary of the Governing Legal Codes

Legal Area

Governing Code / Statute

Relevance to Debt-to-Equity Swaps

Bankruptcy Law

11 U.S. Code (Bankruptcy Code), especially Chapter 11

Core statutory basis for swaps in reorganizations and judicial cramdowns.

Corporate Law

State corporate codes (e.g., Delaware General Corporation Law)

Authority to issue new equity and alter corporate capital structure.

Securities Law

Securities Act of 1933, Trust Indenture Act

Requirements for issuance, registration, and modification of debt/equity securities.

Tax Law

Internal Revenue Code provisions

Tax consequences of debt cancellation and equity issuance.

Special Federal Statute

22 U.S.C. § 5414

Limited to government debt exchanges and not used for corporate restructurings.