Under the Biden Administration, we expect the Department of Justice to reinvigorate the policies aimed at increasing coordination between the criminal and civil divisions. In a 2015 Memorandum – the “Yates Memo” – former Deputy Attorney General Sally Yates pushed for “early and regular communication” between civil and
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
Five Principles For Accurate and Reliable Portfolio Company Valuations
We have seen the SEC increase its focus on valuation of privately-held portfolio companies recently. The SEC’s increased focus is in line with our prediction made in the Top Ten Regulatory and Litigation Risks for Private Funds in 2020 post from the start of this year, and we expect the trend to continue. The global COVID-19 crisis has added a layer of complexity to the valuation process, which for illiquid assets can be challenging during even calm economic conditions. While some companies have benefited from the changes brought on by COVID-19, the overall market conditions resulting from the crisis have led some to predict an increased likelihood of down rounds and a decrease in expected returns, potentially impacting small portfolio companies and large unicorns alike. In some cases, economic uncertainty already has taken a quantifiable toll on the businesses and prospects of portfolio companies. And the process of estimating fair value remains even more challenging because the full scope of the economic downturn remains as yet unknown. Overly optimistic valuations can lead to inflated expectations of fund investors, as well as regulatory risks if the SEC decides to take a closer look at a particular valuation.
Poison Pills In the Wake of COVID-19: A Refresher on Terms and Variations of Shareholder Rights Plans
Shareholder rights plans, commonly known as “poison pills,” are arrangements that can be used by companies to stave off hostile takeovers or activist investors seeking to exert control over a company without paying a control premium. A typical rights plan, if triggered, would allow all shareholders except the triggering person to purchase additional shares in the company at a substantial discount. The resulting share dilution makes it significantly more expensive for the triggering person to purchase a controlling stake in the company. Because of this, it is extremely rare for a rights plan to be triggered; instead, rights plans can have the effect of encouraging hostile bidders or activist investors to negotiate directly with a company’s board of directors.
A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage
“A Fund Managers’ Guide to Maximizing D&O and E&O Insurance Coverage” examines best practices for fund managers—particularly in the current economic climate—for negotiating and obtaining strong insurance protection and maximizing recovery when claims arise. As the economic impact of COVID-19 continues to reverberate across all global industries, there is an
UK’s Financial Conduct Authority Warns That Fund Managers Are at Increased Risk of Cyber Attacks
With 46% of UK business reporting a cyber attack during 2019/2020 and 32% reporting at least one a week – see the UK Government’s Cyber Security Breaches Survey 2020 – the UK’s Financial Conduct Authority (“FCA”) has issued a timely warning to market participants of increasing cyber security threats in the wake of COVID-19.
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.
Privacy in the Time of Pandemic: COVID-19 Provides Opportunity to Revisit Regulation S-P Privacy Policies
With more people working remotely than ever before in light of COVID-19, firms in the private equity and hedge fund space should review their Regulation S-P privacy and information-safeguarding policies to ensure they are compliant and ready for a prolonged period of remote work. In particular, in view of SEC guidance, firms should focus on several key areas including personal devices and personally identifiable information.
What Fund Managers Need to Know About Price Gouging Laws
A new and unprecedented investment environment has been created during the current COVID emergency as every state that has price gouging laws on its books has activated them, and states without official statues are regulating prices by executive order or existing consumer protection and unfair trade practice laws. Never before
COVID-19: Heightened Potential for General Partner Clawbacks (and Disputes)?
We at The Capital Commitment blog have previously discussed several steps for fund managers and others to weather the storm brought by COVID-19. One of those steps is assessing the likelihood of a carried interest return obligation under a fund agreement’s general partner clawback provision (and planning for how to mitigate those obligations, if necessary). A recent article from our colleagues in Proskauer’s Private Funds group highlights the important role that general partner clawbacks play in ensuring the economic deal between a fund manager and the fund’s limited partners is protected, regardless of how market disruptions, such as those brought on by COVID-19, impact a fund’s portfolio.