Private funds frequently negotiate for special rights when making an investment in a portfolio company, such as the right to appoint one or more board directors, voting rights, and liquidation preferences. Fund sponsors often focus solely on the positive aspects of these special rights, such as increased control, without considering fully other implications. As the Peter Parker principle reminds us, with great power comes great responsibility. In the fund context, sponsors should remember the portfolio company corollary: with greater control comes greater exposure to liability. Continue Reading
Late last year, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against Ripple Labs Inc. and two of its executive officers (collectively, “Ripple”), alleging that Ripple raised over $1.3 billion in unregistered offerings of the digital asset known as XRP. Ripple opted not to file a motion to dismiss the complaint, and based on recent filings it appears that the parties do not believe a pre-trial settlement is likely. Continue Reading
Proskauer’s Private Investment Funds Group released its 2020 Annual Review. The yearly report provides a summary of some of the significant changes and developments that occurred in the past year in the private equity and hedge fund spaces, as well as certain recommended practices that investment advisers should consider when preparing for 2021.
COVID-19 continues to disrupt normal business operations, creating liquidity problems and negative working capital for many companies. As fund sponsors take actions to help their portfolio companies navigate through this time, they should also sensitize directors to insolvency issues and the associated litigation risks. As we have previously highlighted, both funds and fund managers may face increased risks of litigation exposure when a portfolio company is running low on cash and faces the possibility of restructuring or reorganizing. The COVID-19 pandemic and the havoc it has wrought in its wake has amplified these risks, as companies scramble to shore up their cash positions. These litigation risks are also magnified when fund managers serve as directors of the distressed portfolio company, given the heightened risk of conflicting fiduciary duties inherent in such dual roles. Continue Reading
The SEC recently finalized a new rule under the Investment Advisers Act of 1940 to govern advertisements by registered investment advisers and payments to solicitors. The amendments create a single marketing rule that (i) revises the definition of an “advertisement,” (ii) sets forth seven general principles governing the use of advertisements, (iii) conditions the use of testimonials, endorsements and third-party ratings in advertisements, and (iv) sets forth requirements for the presentation of performance information in advertisements. The SEC also added corresponding recordkeeping requirements and revisions to Form ADV. The revised marketing rule will be effective 60 days after publication in the Federal Register, and will have a compliance date that is 18 months after the effective date.
This past year, we highlighted a Delaware Chancery case adopting an expansive view in favor of parties seeking information from companies under Section 220 of the Delaware General Corporation Law. The Delaware Supreme Court recently affirmed the Chancery Court’s ruling, providing additional appellate guidance on Section 220 and endorsing limits the Chancery Court set on certain defenses companies may have against such requests.
Read the full post on Proskauer’s Minding Your Business blog.
Over the last few years, we have seen an uptick in litigation claims against sponsors and funds arising out of their interests in portfolio companies. A fund sponsor’s participation on a portfolio company board, in particular, is a risk factor for the entire investment structure (the GP, the Management Company, individual members of the GP and Management Company, and the Fund) due to conflicts of interest, whether real or perceived, and related competing fiduciary duties. There are, however, steps that fund sponsors can take to manage and reduce their risks. The first step is to develop a full understanding of where, and why, risks lie in the investment structure. With that understanding, sponsors can develop and implement practices to manage and reduce those risks.