May 9, 2021

Volume XI, Number 129

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May 07, 2021

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Ten Tips for Navigating Risks and Liability at Portfolio Companies During COVID-19

Many portfolio companies continue to confront business disruptions as a result of the COVID-19 pandemic. Even prior to the pandemic, we were seeing an uptick in litigation claims against sponsors and funds arising out of portfolio companies. The liquidity challenges since March have increased those risks at some companies. For sponsors, many of these risks arise from director positions and conflicts of interest, whether real or alleged. Below we provide tangible ways for fund sponsors to identify risks, educate their directors, and mitigate risk.

Ten Step Action Plan

  1. Create a list of companies with sponsor board members.

  2. Sensitize directors to fiduciary duties to company and shareholders as a whole and fund, and potential conflicts between them.

  3. Scrutinize corporate transactions, particularly in distressed situations, and document decision making.

  4. Consider use of special committees to resolve conflicts; retain fund counsel where fund receives a benefit that not all shareholders receive.

  5. Consider the risk of portfolio company employee claims, including claims arising out of COVID-19.

  6. Sensitize directors to insolvency issues and be mindful of duties to creditors of an insolvent corporation.

  7. Observe best practices: participate in deliberations, adhere to formalities, retain good minutes, exercise care in communications.

  8. Train directors on attorney-client privilege, including distinction between fund counsel and company counsel.

  9. Expect scrutiny of valuation practices and financial records.

  10. Assess relevant contracts and rights (investment agreement, shareholder agreement, insurance contracts, and indemnification rights and obligations).

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© 2021 Proskauer Rose LLP. National Law Review, Volume X, Number 237
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TRENDING LEGAL ANALYSIS

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About this Author

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
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
Jonathan M. Weiss Litigation Attorney Proskauer Rose Los Angeles, CA
Partner

Jonathan Weiss is a partner in the Litigation Department. Jonathan represents both plaintiffs and defendants in a wide range of high-stakes litigation, including antitrust, class action, financial services, securities and other complex commercial litigation. Jonathan has won multiple noteworthy jury verdicts, including the fourth largest jury award in the history of the State of Arizona (over $110 million), and has significant appellate experience briefing and arguing appeals in both state and federal courts across the nation.

Jonathan has been recognized as a “Rising Star” by...

310-284-4524
Alexandra Bargoot, Proskauer Law Firm, Boston, Litigation and Finance Law Attorney
Associate

Alexandra Bargoot is an associate in the Litigation Department and a member of the Private Equity & Hedge Fund Litigation Group. Her practice includes a variety of complex commercial litigation matters, with a focus on private investments funds, involving both private disputes and regulatory issues.

Alexandra assists clients on matters involving SEC investigations, pay to play violations, private actions, sales of investments, investigations of aiding and abetting, arbitration award enforcement, among other areas of expertise.

617-526-9461
Associate

Adam Deming is an associate in the Litigation Department.

617-526-9816
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