USA Trends and Developments, Insolvency 2023
Governance in Distress and Conflict: Maximising Value and Ensuring Deal Certainty
In the late 1990s and early 2000s, private equity firms began to take a more active role in restructuring, generally, and chapter 11 cases, specifically. While prior to that time it was not uncommon for cases to enter chapter 11 in a “free-fall” and for the exit strategy to be sorted out post-filing, many cases quickly assumed a more proactive tempo, with a focus on pre-filing considerations that saw distressed investors
(i) acquire debt in companies to use as post-filing capital or credit;
(ii) negotiate in advance the exit strategy with stakeholders; and
(iii) substantially shorten the time that companies spent in chapter 11 (with a corresponding material decrease in cost).
The active involvement of such investors in the management of the process and the capital structure of distressed opportunities naturally led to the placement of investor representatives on company boards of directors.
When presented with a transaction or situation that involves any prospect of distress, self-dealing or control, adhering to appropriate governance best advances a company’s objective to maximising value of the corporate enterprise. However, since appropriate governance in those instances will necessarily require a release of a certain (or, at times, total) degree of control, it can be difficult for sponsors to cede material decision-making authority to an independent person or entity. In those instances where independence is required but not implemented, the company, including the board, risks litigation, uncertainty and liability.
Recent decisions by the United States Bankruptcy Court for the District of Delaware in Furniture Factory, Pipeline Foods and Sportco Holdings (discussed in greater detail below), underscore the need for portfolio company directors, sponsors and professionals to be particularly vigilant in satisfying traditional fiduciary duties and, where appropriate, to consider engaging independent directors and special committees to insure an unbiased authority at the board, preserve process integrity, and ensure deference to the decisions of a board pursuant to the business judgment rule.