Street smarts in restructuring
It used to be that restructuring lawyers would pen (on a seemingly weekly basis) law review articles and other missives about how directors and officers of insolvent or near-insolvent companies must comply with stringent fiduciary duties to creditors. The state of the law at the time created uncertainties for directors and officers and lent itself to a proliferation on this topic.
In recent years, following the lead of Delaware courts, where many companies incorporate and register, courts around the country have clarified matters somewhat and narrowed opportunities for creditors to sue directors and officers, and in doing so arguably have mitigated risks (both real and perceived) for directors and officers of insolvent or near-insolvent companies. But this is not a post about those developments, for which plenty of scholarship already exists. This is a post about giving practical advice – i.e., advising directors and officers on what they should and should not do.
As business professionals, we believe that authoring soaring masterpieces means little when a lawyer can manage nothing better than mealy-mouthed advice to clients. It is true, of course, that restructuring lawyers have to be the experts, mastering and staying abreast of the law on duties of care and loyalty, the business judgment rule, legal standards for insolvency, creditor standing, exculpation rules for different corporate forms, and other precepts relating to fiduciary duties and insolvent companies. Not stopping there, however, we have to translate that expertise into practical and understandable legal advice for our clients.
Taking this approach, we routinely advise clients not only on how to prevail in litigation, but also, perhaps more fundamentally, on how to minimize the risk of getting sued in the first place. Drawing on decades of experience advising boards and management teams and having litigated these issues in several venues, I can say with confidence that a good dose of common sense rarely hurts in these deliberations. For example, directors and officers should tread very carefully where taking actions that could project real or imagined intentions to hide assets or other value from creditors. When engaging in good faith transfers or other transactions, formalizing and adhering with good governance and other rigorous processes within the organization helps shield against creditor claims. While every engagement presents unique circumstances and challenges, arm’s length transactions involving disinterested parties typically present optimal fact patterns. To the extent insiders may be best positioned to serve as the white knights, often we recommend certain steps (e.g., appointing independent directors or committees, observing corporate formalities, or retaining outside advisors) that help remove the potential taint from a transaction.
While no doubt many directors and officers have their own experience that will assist an enterprise in its restructuring, engaging experienced legal advisors saturated in these issues on a daily basis will help in understanding the nuances and provide in-the-trenches perspectives. Moreover, by itself, the fact that directors and officers rely on qualified legal advisors as part of their decisions can help mitigate litigation risk.
So yes, I write this post to highlight our strength as restructuring lawyers, but not as lawyers who contribute to academic journals. Rather, we are real-world business professionals focused on protecting clients and helping them navigate difficult situations.