Private Equity: 10 Steps for Reducing Sponsors’ Liability Risks at Portfolio Companies
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. A 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, DealLawyers.com September 10, 2020
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