Private Equity: Executing a Successful Leveraged Dividend Recapitalization

Analyzing Solvency Criteria and Legal Compliance, Avoiding Fraudulent Conveyance Claims and Director Fiduciary Liability

A live 90-minute CLE webinar with interactive Q&A


Wednesday, April 12, 2017 (in 13 days)
1:00pm-2:30pm EDT, 10:00am-11:30am PDT


This CLE webinar will examine the criteria for a successful leveraged dividend recapitalization and the associated potential insolvency and legal risks (including liability to directors). The panel will discuss implementing risk mitigation strategies to avoid fraudulent conveyance, breach of fiduciary duty and other claims.

Description

In a leveraged dividend recapitalization, the private equity investor seeks to realize value from the forward-looking cash flows of a private company while retaining its ownership interest in the business. This is accomplished with new debt and payment of a dividend funded with the loan proceeds. Since 2012, private equity firms have arranged hundreds of such transactions totaling over $150 billion.

The additional debt burden can pose risks which must be addressed in advance by counsel and the company’s directors. If not properly underwritten, a dividend recapitalization can threaten the solvency of the company, potentially resulting in claims of fraudulent conveyance, breach by portfolio company directors of their fiduciary duties, and payment of distributions in violation of statutory requirements under state law.

Listen as our authoritative panel reviews the general structure of a leveraged dividend recapitalization, and the financial stress and potential claims which might result from the additional indebtedness. The panel will also discuss risk mitigation strategies—including insolvency analysis, obtaining a solvency opinion and implementation of an independent decision-making process by the board of directors—which should be implemented before proceeding with a dividend recapitalization.

Outline

  1. What is a leveraged dividend recapitalization? Review of structure
  2. Criteria for determining if company is a viable candidate for a leveraged dividend recapitalization
    1. Conservative debt levels
    2. History of consistent revenue growth
    3. Predictable cash flows
  3. Potential risk—actions by creditors to recover dividends because:
    1. The company was insolvent at the time the dividend was paid
    2. The dividend constitutes a fraudulent conveyance
    3. The board of directors breached its fiduciary duty by declaring and paying the dividend
  4. Confirming solvency
    1. Metrics which indicate company solvency both before and after the recapitalization
    2. Solvency opinion
  5. Statutes of limitations
  6. Director Liability
    1. Fiduciary duty
    2. Implementing a process for independent decision-making—avoiding actual or perceived conflicts of interest

Benefits

The panel will review these and other key issues:

  • When is a leveraged dividend recapitalization appropriate for a privately held company?
  • What are the risks to consider before proceeding with this type of recapitalization?
  • How are present and future solvency evaluated and what is a solvency opinion?
  • What steps should be taken to avoid actual or perceived conflicts of interest on the part of directors in approving recapitalization?

Faculty

Jennifer E. Daly, Partner
King & Spalding, New York

Ms. Daly focuses her practice on leveraged finance. She represents financial institutions, lenders, private equity sponsors, public and private issuers and borrowers in leveraged finance and other secured and unsecured lending transactions, including leveraged buyouts, dividend recapitalizations, add-on acquisitions, mezzanine financings, second lien financings, and other junior capital financings, asset-based lending, high-yield bond finance, restructurings and workouts. Previously, she was a Director at Bank of America Merrill Lynch where she helped negotiate finance documents for high-profile hedge fund clients. She later joined Bank of America’s Prime Brokerage Sales team where she helped craft strategic solutions for institutional equities clients and assisted emerging managers in navigating all phases of the hedge fund launch process. 

Andrew Hulsh, Partner
Pepper Hamilton, New York

Mr. Hulsh focuses his practice on domestic and cross-border private equity-backed and strategic mergers, acquisitions and recapitalization transactions including initial and secondary public offerings of equity, debt and hybrid securities, private equity fund formation transactions and the acquisition of fund managers of complex domestic and offshore investment management platforms, compliance with reporting and other obligations under U.S. securities laws, and venture capital investments. His clients include public and privately held companies and firms, including leading private equity sponsors, hedge fund managers, major investment banks and other financial institutions.

Jeffrey Pawlitz, Partner
King & Spalding, New York

Mr. Pawlitz represents debtors, creditors, equity sponsors, and strategic investors in all aspects of distressed restructurings. He advises senior managers and boards of directors as to operating in Chapter 11 and fiduciary duty considerations. He also provides advice regarding strategic restructuring alternatives, including with respect to pre-negotiated Chapter 11 proceedings and out-of-court deals. In addition to company-side representations, he advises lenders and fund clients in M&A transactions.


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