September 25, 2021

Volume XI, Number 268

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September 23, 2021

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Portfolio Companies Continue to be a Source of Litigation Risk

A significant ownership stake in a portfolio company has always raised the specter of claims against funds, sponsors, and sponsor-appointed board designees, if for no other reason than they are perceived by the plaintiffs’ bar to be deep pockets.  This risk has only increased in recent years, as it has become less taboo – indeed, it is becoming commonplace – for founders, management, significant shareholders, and even other sponsors to sue private fund sponsors in connection with change of control transactions. Every significant transaction produces relative winners and losers, even those that are perceived by the market as homeruns such as a unicorn IPO or merger with a SPAC. Fund sponsors, and especially those that hold board seats, should therefore use extra caution and remember that more control comes with greater risk of liability.

Especially in today’s uncertain market landscape, it is imperative that fund sponsors and their board designees familiarize themselves with the risks associated with portfolio company disputes. For example, sponsors should ensure that GPs who serve on boards are aware of possible conflicts of interest that come from their dual fiduciary duties to the portfolio company and the fund, and should carefully evaluate change of control and/or liquidity events and consider whether procedural safeguards regarding process and price are necessary or prudent.

Insurance coverage, including D&O insurance, plays a critical role as a risk management tool.

Joshua M. Newville, Todd J. Ohlms, Seetha Ramachandran, Ana Vermal, Samuel J. Waldon, Jonathan M. Weiss, Anthony M. Drenzek, James Anderson, Alexandra V. Bargoot, William D. Dalsen, Adam L. Deming, David W. Heck, Hena M. Vora and Lucy C. Wolf also contributed to this article.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 97
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About this Author

Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

+44.20.7280.2031
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Timothy W. Mungovan, Litigation Attorney, Proskauer Law Firm
Partner

Timothy Mungovan is a Partner in the Litigation Department, co-head of the Private Investment Funds Disputes practice and a member of the Private Investment Funds Group. Tim has an international practice in complex commercial litigation, advising public and private companies in a variety of areas, including securities, corporate governance, fiduciary obligations, investment management and financial services, fraud and trade secrets.

In addition to his regular commercial litigation practice, Tim focuses on disputes involving private investment...

617-526-9412, 212-969-3201
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