September 10, 2020
Private Equity: 10 Steps for Reducing Sponsors’ Liability Risks at Portfolio Cos.
Even before the disruptions caused by the Covid-19 pandemic, private equity sponsors were increasingly on the receiving end of claims seeking to hold them responsible for liabilities of their portfolio companies. This Proskauer blog identifies the following 10 steps that sponsors can take to help mitigate their liability risk:
– Create a list of companies with sponsor board members.
– Sensitize directors to fiduciary duties to company and shareholders as a whole and fund, and potential conflicts between them.
– Scrutinize corporate transactions, particularly in distressed situations, and document decision making.
– Consider use of special committees to resolve conflicts; retain fund counsel where fund receives a benefit that not all shareholders receive.
– Consider the risk of portfolio company employee claims, including claims arising out of COVID-19.
– Sensitize directors to insolvency issues and be mindful of duties to creditors of an insolvent corporation.
– Observe best practices: participate in deliberations, adhere to formalities, retain good minutes, exercise care in communications.
– Train directors on attorney-client privilege, including distinction between fund counsel and company counsel.
– Expect scrutiny of valuation practices and financial records.
– Assess relevant contracts and rights (investment agreement, shareholder agreement, insurance contracts, and indemnification rights and obligations).
– John Jenkins