The Liability Implications of Financial Challenges in Portfolio Companies with Mark Freedlander

Many investors take on an operating thesis that, by law, the obligations of investment companies are not the obligations of the investor. They apply this whether their fund has invested in the securities of a limited partnership, a limited liability company, or a corporation. 

In this episode of The Professor’s Corner, McGuireWoods’ Mark Freedlander joins host Geoff Cockrell to explore the limits of this idea. 

As chair of the bankruptcy group, Mark has seen a host of real-world examples where sponsors of private equity funds get themselves in trouble when their portfolio companies are experiencing financial challenges. 

“If you're a sponsor that owns a distressed company, you need to be careful with money and things leaving that company — both in terms of the timing of when that's happening, the nature in which it's happening, and the value,” Geoff explains. “Recognize that all of those transfers will be looked at after the fact with different eyes.”

It’s within normal course of business for sponsors to be overseeing aspects of the day-to-day management of their portfolio companies. However, if you’re a sponsor that owns a distressed company, you need to be careful about monetary decisions and money leaving that company. 

On this first of two episodes on this topic, both Mark and Geoff review examples of potential issues drawn from real-life situations they have lived through and experienced, along with their experience on the litigation side of these issues. The next episode will continue the discussion where they left off, looking deeper into the nature of these claims and reviewing proper board management. 

Featured Guest

Name: Mark E. Freedlander

What he does: As a Partner at McGuireWoods, Mark has been advising clients about creative, business-oriented solutions to matters involving financial distress for the past 25 years. Mark is a goal-driven problem solver whose clients benefit from the creative, pragmatic, and strategic perspective he brings to each engagement.

Organization: McGuireWoods

Connect: LinkedIn

Notes From the Professor’s Corner

Top takeaways from this episode

• Patterns emerge in troubled portfolios. According to Mark, it’s common for sponsors to see potential claims asserted against them.
• It’s important to understand preference statutes when it comes to payments. A preference statute exists to ensure creditors are treated fairly. Often this will come into play when reviewing payments and antecedent debt with a transferee.
• Fraudulent conveyance is designed to protect creditors from fraud. Compared to preference statutes, fraudulent conveyance exposure doesn’t have the same defenses as a preference action.

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