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.
Snap Judgment: Unicorns Under Pressure and Addressing Risks of Private Lawsuits
The recent IPOs of Snap, Inc. and Blue Apron indicate that while the IPO pipeline continues to flow, there may be a cautionary tale for “unicorns” – venture-backed companies with estimated valuations in excess of $1 billion.
After Snap went public in March, it posted a $2.2 billion loss in its first quarter, yielding a 20% same-day drop in stock price that erased much of the company’s gains since its IPO. A snapshot of Snap’s stock price shows the obvious risks faced by late-stage investors in unicorns. High valuations are not a guarantee of continued success, particularly where historical performance and profitability are lacking. Although one commentator recently asked: “Are Blue Apron and Snap the worst IPOs ever?”, there is plenty of time for those stock prices to recover, especially in the months after their insider lockup periods expire.