Articles

This article discusses the considerations that C-suite executives, including CEOs and CFOs, should keep in mind when deciding whether to file for Chapter 11 bankruptcy. The author, Kenneth A. Rosen, emphasizes the need for a thorough analysis of the true costs of bankruptcy before making such a decision. Rosen highlights that Chapter 11 can devalue a company, and the longer the reorganization process takes, the more value the company may lose. He suggests that executives should carefully weigh the direct and indirect costs of bankruptcy, including professional fees, increased borrowing costs, credit downgrades, erosion of customer trust, and strain on supplier relationships. The article also touches upon the concept of a "cram down" reorganization, where a court approves a bankruptcy reorganization without the approval of some creditors. However, Rosen cautions against relying solely on this strategy, emphasizing the importance of considering the best interests of creditors and ensuring that the secured creditor receives at least the value of their collateral. Ultimately, Rosen advises that settling with creditors outside bankruptcy may be a more attractive option if it enables a successful restructuring before reaching the point of no return. He suggests that the goal should be a settlement that allows for a quick emergence from financial distress and the restoration of the company's stability. In casual terms, it's like Rosen is saying, "Before jumping into Chapter 11, leaders should really think about the costs involved. It's not just about numbers; there are other factors like trust and relationships. Sometimes settling outside bankruptcy might be a smarter move for the long-term health of the company.

This article, written by Kenneth A. Rosen and Scott Cargill, discusses the challenges that corporate lawyers may face when balancing their duty to advocate for a client's goals with their ethical obligations to objectively assess established law. The authors use the Delaware Court of Chancery's decision in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP as a case study to highlight the dangers of losing objectivity and professionalism in the pursuit of a client's financial objectives. In the case, Loews Corporation sought an opinion of counsel allowing it to exercise a buyback option in a transaction involving Boardwalk Pipeline Partners. The court found that the legal opinion was "contrived" and delivered in "bad faith," as it relied on "counterfactual assumptions" to achieve a desired result, despite significant uncertainty in key facts. The court ruled against Loews, stating that its efforts constituted "willful misconduct," and awarded over $690 million in damages to shareholders. The key takeaways from the article emphasize that attorneys should not reach legal conclusions under undue client pressure, should not rely on untrue facts, and must perform adequate diligence. Additionally, when delivering a legal opinion, law firms can make good faith predictions about the future but should not assume future outcomes. The importance of balancing zealous advocacy with adherence to ethical rules, professionalism, and common sense is emphasized. What are your thoughts on the challenges faced by corporate lawyers in maintaining objectivity and professionalism while advocating for their clients' interests?

In Kenneth A. Rosen's discussion, the complexities of administrative claims in Chapter 11 bankruptcy proceedings are explored. While claims arising from goods or services provided to the debtor during bankruptcy hold administrative status, the dynamics change when lenders extend crucial financing in the form of "DIP" (Debtor-in-Possession) loans. Lenders secure a super priority administrative claim, granting them precedence over other administrative claims. Professionals involved in the case often negotiate a "carve out" to prioritize their administrative claims over those of lending institutions, providing a level of protection against the impact of super priority claims. Despite cash flow challenges faced by the debtor, professionals typically receive periodic payments, with 80% of their invoices settled monthly and the remaining 20% every 120 days. However, it is emphasized that guaranteed payment for administrative claims is not assured. Instances of a debtor's estate becoming administratively insolvent are not uncommon, as demonstrated by cases like Toys R Us and Sears. This highlights the importance of a comprehensive understanding of Chapter 11 dynamics for entrepreneurs, emphasizing the need to navigate the intricate financial landscape and strategically safeguard the interests of professionals involved in the proceedings.

In Kenneth A. Rosen's comprehensive checklist, businesses facing financial challenges, whether internally or externally driven, are provided with actionable steps for effective crisis navigation and recovery. Internally, the focus is on assessing and enhancing cash flow, adapting revenue models, addressing debt concerns, managing legal considerations, optimizing cost structures, and strategically approaching product life cycles and customer relationships. Externally, the checklist advises businesses to mitigate supply chain disruptions, secure raw materials, navigate transportation costs, adapt to inflationary trends, manage interest rate risks, monitor consumer habits, plan for import/export challenges, address labor shortages, prepare for natural disasters, evaluate global risks, and establish pandemic response protocols. This thorough guide emphasizes proactive and strategic measures to help businesses not only weather financial distress but also position themselves for sustained recovery.

In his article, "Navigating Nuances: A Comprehensive Approach to Assessing Director Independence in Evolving Corporate Governance," Kenneth A. Rosen highlights a significant shift in the evaluation of director independence. While traditional assessments focused on tangible business relationships, a new emphasis is emerging on the relationships between independent directors and those responsible for their nomination. Rosen emphasizes the crucial role of thorough due diligence for general counsel in this evolving landscape, urging a proactive approach that goes beyond conventional criteria. The article recommends expanding due diligence protocols, enhancing board education, embracing proactivity, and regularly reviewing governance practices to align with changing legal standards. The overarching message is clear: as criteria for director independence evolve, a comprehensive and forward-looking approach is essential for upholding the highest standards of corporate governance.