Paul Tiger is a partner and Kelsey MacElroy is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.
As the economy continues to experience daily turmoil in the wake of the COVID-19 crisis, it becomes increasingly likely that some companies will feel the need to enter into dilutive financings and downside exits.
This new reality poses heightened challenges for boards and increases the likelihood of litigation, as has occurred in past downturns.
For those not looking to repeat history, here’s a look-back at some of the mis-steps that boards of financially distressed companies have made when seeking financing or considering downside exits while in distress, together with some lessons learned about how boards can get it right during these difficult circumstances.
In each of these situations, insiders came to the rescue of a struggling company. At the time, these insiders thought they were stretching to provide support where no one else would tread.
These insiders viewed themselves as courageously taking on risk to save a bad situation from getting worse. But in hindsight, after the turnarounds had occurred, all that the other equity holders and the courts were able to see were flawed board processes.