Every situation is different and needs its own legal scrutiny. And we are not attorneys. But many corporate directors, particularly those who have never been through the distressed experience, will be rightly concerned.
Board members will be inundated with many lawyers and well-wishers telling them that they need to pursue peace with the creditors in order to get releases. In some instances, we have even seen attorneys largely usurp the Board’s role under the guise of protecting the Directors from litigation. Meanwhile, the lawyers give away the values to creditors, many of which could be such attorneys’ clients in other matters.
The Optimum Way to Deal With Creditors
We disagree with the appeasers of this world who believe that capitulation to creditors is necessary to get releases or that capitulation always produces the anticipated benefits of releases. Further, we do not believe that sacrificing the recovery of a junior constituency (think Old Equity) is necessarily the right way to achieve the desired legal protection. Voracious creditor groups may simply expect to eviscerate Old Equity, and then seek to have the Board (and the D&O carrier) pony up additional consideration. Tough negotiations with creditors and others may be a more fruitful path for management and Old Equity.
These Are the Board’s Top Priorities and Considerations
We wholeheartedly agree with the premise that one of a Board’s top priorities is to obtain releases for itself and the management team. But there may be other objectives that a Board needs to consider, particularly in a situation where there is concentration of equity holdings. In our view, the Board should establish a list of priorities, and then develop a coherent strategy in which it can achieve some or all of these objectives through skillful implementation of an insolvency strategy.
We think it boils down to common sense. Is a Board better off taking a firm position on a number of fronts in order to achieve success at least on the ones it deems more important? Or is it better off immediately asking for releases in exchange for giving the creditors everything else they want? Given that the first alternative deals from a position of strength (and the latter from weakness), we are staunch advocates of Door Number 1.
A Lesson Learned is a Lesson Earned
There is a lesson here in our book. When a group of professionals tells the Board that the key to getting releases is to follow the professionals’ advice and let them handle things – watch out. The Board should never cede control to its professionals, even its attorneys. The Board’s agenda is likely to be different from its professionals’, some of whom may be conflicted due to relationships with adversaries in the restructuring.