Liability Management: Restructuring Debt and Protecting Boards

A tender offer gives holders of existing debt securities the opportunity to tender their instruments in exchange for cash, new securities, or a combination of both, and leveraged finance and debt finance counsel structuring a liability management tender offer must evaluate the applicable securities law requirements, including the minimum offering period, the withdrawal rights that must be given to tendering holders, and the disclosure obligations that apply if the offer is made to holders of publicly registered securities.

A consent solicitation seeks approval from the required majority of debt holders to amend the covenants, events of default, or other provisions of an existing indenture or credit agreement, and debt finance counsel in a liability management consent solicitation must evaluate which provisions require unanimous consent and which can be amended by a specified majority, since this distinction determines which covenant restrictions can be removed through majority approval and which require more creative structural solutions.

Directors of a company that is in the zone of insolvency owe duties not only to shareholders but also to the company itself for the benefit of all stakeholders including creditors, and directors and officers liability counsel advising distressed boards must help directors document that each significant decision was made on an informed basis, with independent professional advice where appropriate, and with a reasonable belief that the decision would maximize enterprise value for all stakeholders.

A fraudulent transfer claim challenges a prepetition transaction on the grounds that the company received less than reasonably equivalent value in exchange for the assets or obligations it transferred, and fraudulent transfer claim defense counsel must demonstrate that the company received fair consideration, that the company was not insolvent at the time of the transaction, or that the transaction falls within one of the recognized safe harbors that protect qualified financial contracts and securities settlement transactions.

An intercreditor agreement allocates the rights and remedies of different creditor classes, specifying which class has enforcement priority and what actions are prohibited without the other's consent. Creditors and creditors' committees counsel must evaluate whether the subordination provisions are effective and whether standstill provisions can be enforced against a holdout creditor.

A company that needs to raise cash quickly through asset sales faces the risk that a sale completed at a time of financial stress will be challenged as a fraudulent transfer if the company subsequently files for bankruptcy. Financial restructuring and insolvency counsel must obtain an independent valuation of the assets sold, structure the process to generate competitive bidding where possible, and document the board's reasonable belief that the price obtained represented fair value.

A pre-packaged bankruptcy plan is negotiated and voted upon by creditors before the petition is filed, allowing the company to seek court confirmation of an already-agreed liability management restructuring. Chapter 11 counsel designing the plan must ensure it complies with all Bankruptcy Code classification, equal-treatment, and feasibility requirements.

A plan of reorganization or an out-of-court restructuring settlement can include releases of claims by and against the debtor, its affiliates, its directors and officers, and other parties who contributed to the restructuring, and corporate restructuring counsel drafting the release provisions must ensure that the releases are sufficiently specific to cover all claims arising from the prepetition transactions being resolved while remaining narrow enough to withstand challenge from creditors who argue the releases are overbroad.