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.

Ten Step Action Plan

  1. Create a list of companies with sponsor board members.
  2. Sensitize directors to fiduciary duties to company and shareholders as a whole and fund, and potential conflicts between them.
  3. Scrutinize corporate transactions, particularly in distressed situations, and document decision making.
  4. Consider use of special committees to resolve conflicts; retain fund counsel where fund receives a benefit that not all shareholders receive.
  5. Consider the risk of portfolio company employee claims, including claims arising out of COVID-19.
  6. Sensitize directors to insolvency issues and be mindful of duties to creditors of an insolvent corporation.
  7. Observe best practices: participate in deliberations, adhere to formalities, retain good minutes, exercise care in communications.
  8. Train directors on attorney-client privilege, including distinction between fund counsel and company counsel.
  9. Expect scrutiny of valuation practices and financial records.
  10. Assess relevant contracts and rights (investment agreement, shareholder agreement, insurance contracts, and indemnification rights and obligations).

For further information regarding sources of risks and liability for portfolio companies and fund sponsors, contact us regarding Navigating the COVID-19 Liquidity Crisis: The Portfolio Company Playbook.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

Photo of Timothy W. Mungovan Timothy W. Mungovan

Tim Mungovan serves as chair of the Firm’s Litigation Department, co-head of Proskauer’s Commercial Litigation Practice Group and co-head of the Asset Management Litigation team. His practice is focused on solving complex business disputes in a variety of areas including securities, investment management…

Tim Mungovan serves as chair of the Firm’s Litigation Department, co-head of Proskauer’s Commercial Litigation Practice Group and co-head of the Asset Management Litigation team. His practice is focused on solving complex business disputes in a variety of areas including securities, investment management, corporate governance, fiduciary obligations, capital markets, financial services, bankruptcy and insolvency. A significant portion of Tim’s practice involves disputes and risk management for private investment funds (private equity, venture capital and hedge funds) and private credit vehicles.

Recently, Tim has been heavily involved in: representing the Financial Oversight and Management Board for Puerto Rico in litigation involving the restructuring of Puerto Rico’s finances; SEC investigations of advisers to private equity funds and venture funds; control contests within advisers to private equity and venture capital funds; debt restructuring disputes on behalf of private credit funds and business development companies (BDCs); and litigation on behalf of two publicly-listed biotech companies against a hedge fund manager and a venture fund manager, respectively.

Photo of Michael R. Hackett Michael R. Hackett

Michael R. Hackett is a partner in the Litigation Department and a member of the Asset Management Litigation practice. Mike is an experienced litigator and trial lawyer focused on sophisticated business disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving…

Michael R. Hackett is a partner in the Litigation Department and a member of the Asset Management Litigation practice. Mike is an experienced litigator and trial lawyer focused on sophisticated business disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to disputes between limited partners and general partners, to representation of investment advisers in connection with regulatory examinations, investigations and enforcement matters. Mike also routinely represents fund sponsors and their portfolio companies, including in significant post-closing disputes.

In addition to his private funds practice, Mike represents public and private companies in a variety of complex commercial and securities litigation matters, including in the areas of corporate governance, fiduciary obligations, capital markets, financial services, and bankruptcy and insolvency.

Mike has been named a “Rising Star” by Massachusetts Super Lawyers, and was identified as an “associate to watch” by Chambers USA in 2017 and 2018.

During law school, Mike served as an intern judicial clerk to the Honorable William G. Young of the United States District Court for the District of Massachusetts.

Photo of Jonathan M. Weiss Jonathan M. Weiss

Jonathan Weiss is a partner in the Litigation Department. Jonathan represents both plaintiffs and defendants in a wide range of high-stakes litigation, including antitrust, class action, financial services, securities and other complex commercial litigation. Jonathan has won multiple noteworthy jury verdicts, including the…

Jonathan Weiss is a partner in the Litigation Department. Jonathan represents both plaintiffs and defendants in a wide range of high-stakes litigation, including antitrust, class action, financial services, securities and other complex commercial litigation. Jonathan has won multiple noteworthy jury verdicts, including the fourth largest jury award in the history of the State of Arizona (over $110 million), and has significant appellate experience briefing and arguing appeals in both state and federal courts across the nation.

Jonathan has been recognized as a “Rising Star” by Southern California Super Lawyers every year since 2011, and was recognized by Legal 500 U.S. in their 2015 leading lawyers in appellate litigation edition, noting his “incredibly dedicated” advocacy on behalf of his clients. Jonathan has also spent considerable time on pro bono matters, for which he has been honored by Public Counsel among other organizations.

In addition to his busy practice, Jonathan has taught courses on Ninth Circuit appellate advocacy throughout Southern California and has lectured at several universities nationally, including Harvard Law School, UCLA Law School, the University of Illinois and the University of Pittsburgh. Jonathan is also a member of the Pacific Council on International Policy.

Photo of Alexandra V. Bargoot Alexandra V. Bargoot

Alexandra Bargoot is an associate in the Litigation Department and a member of the Private Equity & Hedge Fund Litigation Group. Her practice includes a variety of complex commercial litigation matters, with a focus on private investments funds, involving both private disputes and…

Alexandra Bargoot is an associate in the Litigation Department and a member of the Private Equity & Hedge Fund Litigation Group. Her practice includes a variety of complex commercial litigation matters, with a focus on private investments funds, involving both private disputes and regulatory issues.

Alexandra assists clients on matters involving SEC investigations, pay to play violations, private actions, sales of investments, investigations of aiding and abetting, arbitration award enforcement, among other areas of expertise.

During her time at Cornell Law School, Alexandra served as senior online notes editor for the Cornell International Law Journal. She also clerked for Judge Frederick Brown of the Massachusetts Appeals Court in the summer of 2014.

Photo of Adam L. Deming Adam L. Deming

Adam Deming is an associate in the Litigation Department.