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Archive for May 2nd, 2020

Duties to Shareholders and Credtiors

  • Understand the fiduciary duties of the board and be cognizant of the interests of both shareholders and creditors.
  • Understand how the board’s fiduciary duties may evolve over time depending on the Company’s financial status.
  • Analyze tradeoffs between creditors’ and shareholders’ interests, with an eye toward community of interests as a whole.
  • Scrutinize actions that may increase shareholder value but that may put creditors at risk.
  • Confirm that the board is undertaking a sufficiently deliberative process and that the board is aware of its fiduciary duties.
  • Assess the likelihood of claims for breach of fiduciary duty.

Financial Analysis and Due Diligence

  • Understand the Company’s cash flow forecasts, the assumptions behind the forecasts, and the ramifications of incorrect assumptions.
  • Determine whether the Company has any unpaid statutory obligations and whether the cash flow forecasts provide for the payment of statutory obligations (e.g., tax, insurance, and employee obligations) and wind down costs.
  • Identify key customers and vendors and ask if they will be impacted by the pandemic.
  • Pay statutory obligations immediately or set aside reserve funds for payment of the statutory obligations.
  • Assess liabilities (both known and contingent).
  • If the Company has less than three months of cash, the Company should immediately evaluate whether it has the ability to raise additional financing.
  • Investigate and evaluate strategic alternatives to maximize value for all constituents.
  • Obtain information from management and outside professionals to evaluate alternatives.
  • Exercise care in approving transactions that leave the Company inadequately capitalized even if the Company is solvent.
  • Consider: 1) Initiating a “date certain” sale process; 2) Furloughing or terminating employees; and 3) Discontinuing payments to nonessential vendors.
  • Refrain from giving preference to one creditor class over another.
  • Scrutinize all insider transactions.

 Taxes and Insurance

  • Confirm that all tax obligations (franchise taxes, sales and use taxes, withholding taxes) have been paid and continue to be paid.
  • Confirm that all insurance policy premiums and renewals (including D&O policies) have been paid.
  • Review all healthcare insurance policies. Consider COBRA ramifications.

Employees

  • Consider vacation benefits and similar payment obligations (e.g., unpaid wages, unemployment, workers’ comp, and disability).
  • Comply with federal and state WARN Act requirements (if applicable, 60 days’ notice of termination or pay salary and benefits for any portion of notice not given).
  • Decide whether to terminate 401(k) plan. (Failure to terminate/wind up plan can expose directors and officers to additional liability.)
  • Refrain from paying bonuses or other unusual payments to executives, directors or officers.
  • Make arrangements with payroll service provider to issue W2s after tax year ends.

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