Help, My Business Is In Trouble!

HELP, MY BUSINESS IS IN TROUBLE!RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2016 SERIES

Premier date: February 5, 2016

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

restructuring, insolvency & troubled companies 2016 series

HELP, MY BUSINESS IS IN TROUBLE!

Premier Date: February 5, 2016

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS



meet the facultyPANELISTS

Laura Davis Jones Pachulski Stang Ziehl & Jones LLPThomas J. Salerno Stinson Leonard Street LLPHoward Samuels Rally Capital Services LLC

MODERATOR Jonathan Friedland,

Sugar Felsenthal Grais & Hammer LLP

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Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

5

http://www.financialpoise.com/


about this webinarWhen a business becomes financially troubled, the business owner often experiences denial, paralysis, or both. Lenders commonly lose confidence and then trust in the business, as communications tend to break down, deadlines are missed, and promises are broken.

Small business owners commonly have issued personal guaranties, so business failure can often lead to personal financial stress.

The good news is the business and business owner usually has some options, and even some leverage. This webinar explains what a business owner should- and should not- consider and do when dealing with financial trouble.

Specific topics include discussion of bankruptcy (Chapters 7 and 11); assignments for the benefit of creditors; and friendly foreclosures. It provides the business owner and her advisors with an overview of various restructuring and liquidation methods, a framework for how to decide between them, and practical tips for traversing the difficult environment that is financial distress.

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about this seriesCompanies fail all the time, for all sorts of reasons. Some companies become distressed, or even insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some intrinsic to the company and some extrinsic.

Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even opportunities for all involved. This area of law and finance has become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround Management Association) national organizations exist to help those who specialize in the field to stay up to date on the latest developments, strategies, and tactics in the area.

Join some of the leading experts in World, from among the membership of these organizations, as they discuss- in plain English for the non-expert- the basics and the latest in Restructuring, Insolvency & Troubled Companies.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs. 7


episodes in this series

EPISODE #1 Help, My Business is in Trouble! 2/5/2016

EPISODE #2 Opportunity Amidst Crisis – 3/4/2016Buying Distressed Assets, Claims, and Securities for Fun & Profit

EPISODE #3 What to Expect & Do When Your Customer Becomes Insolvent4/8/2016

EPISODE #4 A Distressed Company and its Secured Lender 5/6/2016

EPISODE #5 Federal Equity Receiverships - 101

6/3/2016 Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo

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STRATEGIC ALTERNATIVES FOR DISTRESSED BUSINESSES

Chapter 11Assignment

for the Benefit of Creditors

Creditor Composition Workout Sale by

Debtor


STRATEGIC ALTERNATIVES AGAINST DISTRESSED BUSINESSES

Foreclosure Receivership Article 9 Sale


FACTORS THAT AFFECT THE DECISION


Future of the business going

forwardSize of the company

(and whether public/private/nonpro

fit)

Relationship with secured

creditorsNumber of

creditors and the amount of debt

Cost and length of the

process

Buyer’s risk tolerance

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KEY QUESTIONS THAT DRIVE STRATEGY• What does the senior secured creditor(s) want to do?• What does a buyer want to do?• Are there personal guarantees? • Will customers care that debtor is having financial problems?

• How is debtor’s relationship with its key vendors? • Are any vendors irreplaceable as supply sources?• How competitive is the debtor’s business? • Are related entities not troubled?

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FIDUCIARY DUTIESIt is well-settled that directors of solvent corporations generally owe fiduciary duties to the corporation and its shareholders

It is also well-settled that directors of insolvent corporations owe fiduciary duties to exercise their business judgment in the best interest of the insolvent corporation

However, a grey area exists for directors of corporations that are solvent but operating within the zone of insolvency


FIDUCIARY DUTIES: GHEEWALLA

Prior to Gheewalla, most courts followed the general guidelines

set forth in Credit Lyonnais., which stood for the basic proposition that once a

corporation enters the zone of insolvency, directors and officers owe their primary

fiduciary duties to the corporate entity as a whole.

Gheewalla and its progeny have clarified that there is no change in a director’s duties when a solvent corporation

begins to operate in the zone of insolvency, thus making the issue of solvency/insolvency

still more weighty.


A BUYER’S PERSPECTIVEBuyers like to buy cheap but want to avoid risk.Some options are cheaper but pose more risk;others are more expensive but pose less risk.

What Risks?

Successor liability

Allegations of fraudulent transfers


CHAPTER 11 REORGANIZATIONS


Petition is filed with the bankruptcy court (either voluntarily or involuntarily)

The debtor, as the debtor-in-possession, acts as the trustee of the business

Debtor-in-possession financing

Automatic stay

Rejection of certain executory contracts

Fixed priority order

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Binds all creditors

Automatic stay (requires all creditors to

cease collection efforts)

Sales are made free and clear

Rejection of burdensome

contractsCertain tax advantages

CHAPTER 11 REORGANIZATIONSADVANTAGES


Higher cost Longer process Reporting requirements

Stigma associated with

bankruptcy

CHAPTER 11 REORGANIZATIONSDISADVANTAGES


ASSIGNMENT FOR BENEFIT OF CREDITORS

Commonly like a Chapter 7 (but

“operating assignments”

possible)

Debtor assigns all of its assets to an independent

fiduciary for creditors

Fiduciary sells all the assets and

distributes proceeds to the

creditors

Distribution done fairly

consistently with Bankruptcy Code priority scheme


ASSIGNMENT FOR BENEFIT OF CREDITORS ADVANTAGES


Generally quick and relatively inexpensive means of liquidating a company, especially as compared with Chapter 7

Priority of claims is known (with some Assignee latitude)

Unsecured hold-out creditors encouraged to participate since all of Debtors’ right, title, and interest is transferred to Assignee

Less risk of “Chapter 5”-like lawsuits

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ASSIGNMENT FOR BENEFIT OF CREDITORS DISADVANTAGES


Secured creditors can still foreclose; involuntary bk possible

Non-uniform law (varies state-by-state)

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CREDITOR COMPOSITION

Sometimes referred to as an out-of-court Chapter

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Creditor composition is a contract between a

debtor and its creditors

Participating creditors agree to accept certain

payments in full satisfaction of their claims



CREDITOR COMPOSITION ADVANTAGESWill allow the company to work with its creditors to continue operations

May maximize going concern value of the company

Less expensive than Chapter 11

No court or trustee oversight

No Chapter 11 stigma

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CREDITOR COMPOSITION DISADVANTAGES

HoldoutsMay impose certain

restrictions on DebtorLengthy negotiating

process24

WORKOUTS


Since it may be difficult to obtain consent of nearly all creditors as required for a composition, a company may opt to seek concessions

solely from its financial creditors (bank, equipment lessors, bondholders, etc.)

A Workout Agreement will restructure the debt of a particular creditor

Generally, Creditor will agree to deferred payments, extended time of repayment,

and/or reduced total amount of indebtedness.

In exchange, Debtor may be required to sell assets, grant additional collateral, meet

certain operational benchmarks and/or be subject to heightened financial reporting.

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WORKOUTS - ADVANTAGES

Because consent of all creditors is

not required, generally easier to

put in place

Easier to negotiate because only one party and may not require disclosure

of financial condition to other

creditors

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WORKOUTS - DISADVANTAGES

Creditors who are secured may have little incentive to renegotiate terms

Creditors may insist on workout or turnaround consultant being involved in operation of the business, and/or other restrictions on activities of the business

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“NAKED” SALE BY DEBTOR

Debtor sells its assets, generally to a secured lender, or to a third party (potentially to its own shareholders) with the consent of the secured lender.

Advantages• Quick and relatively inexpensive method of liquidating a business• May also serve as a quick method for the sale of a company as a going

concern

Disadvantages• Requires consent of all lienholders• Treatment and impact of unsecured creditors.• Possibility of being deemed a fraudulent transfer• Breach of fiduciary duty concerns for board of directors of debtor



ARTICLE 9 SALES• Fast and inexpensive way to sell a secured creditor’s collateral• UCC permits a secured party to take possession of its collateral and,

without removing the collateral from the debtor’s premises, dispose of it• Sale must be commercially reasonable• The secured party may purchase the collateral at a public sale but not at

a private sale unless the collateral has a public market where the price can be readily ascertained

• The secured party must notify the debtor and any other guarantors or obligors as well as other junior secured parties

• When the rules are followed, all of Debtor’s rights in collateral are transferred and subordinate security interests are discharged. A good faith purchaser for value takes title free and clear even when secured party fails to strictly comply with the statutes

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More About The Faculty: JONATHAN FRIEDLAND

[email protected] Friedland is a partner with Sugar Felsenthal Grais & Hammer LLP. He regularly represents parties in the purchase and sale of businesses and counsels businesses and their owners in their everyday affairs. Jonathan is also a nationally recognized expert in matters related to financially distressed companies.

Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in the areas of Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, and has received several other similar distinctions. He is licensed to in Arizona, Illinois, New Jersey and New York.

Jonathan has been profiled, interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire; and The Daily Deal. He has authored three books and more than a hundred articles, and has spoken on more than 100 panels.

Jonathan is also the founder and chairman of DailyDAC, LLC, d/b/a Financial Poise™, an on-line provider of continuing education, information, and business intelligence for business owners, investors, and their trusted advisors. Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 after three years of study and from the University of Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice, spent several years teaching MBA candidates as an Adjunct Professor of Strategic Management at the University of Chicago Booth School of Business, and was the 2006 Clayton Center for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan was a partner with Kirkland & Ellis LLP before joining SugarFGH.

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More About The Faculty: D

LAURA DAVIS [email protected]

Laura Davis Jones is a name partner and the managing partner of the Delaware office of Pachulski, Stang, Ziehl, & Jones. She gained national recognition as debtor's counsel in the Continental Airlines bankruptcy case, and has represented numerous debtors, creditors' committees, bank groups, acquirers, and other significant constituencies in national chapter 11 cases and workout proceedings. She lectures at national bankruptcy and litigation seminars, and has authored numerous articles. Laurawas named "Deal Maker of the Year" by The American Lawyer in 2002 and has also been profiled in The American Lawyer.

Laura has been named continuously by her peers as one of the "Best Lawyers in America" and as one of the "Best Lawyers in Delaware." In addition to being named a "Delaware Super Lawyer" every year since 2007, she was selected as one of the top ten lawyers in Delaware in 2007 and 2008. She is included among Chambers USA America's "Leading Lawyers for Business," and ranked among the top-tier Bankruptcy/Restructuring lawyers in Delaware. Laura has been recognized in the K&A Restructuring Register since its inception, has been named repeatedly to the International Who's Who of Insolvency and Restructuring Lawyers, and has been listed among the "Lawdragon 500 Leading Lawyers in America" since 2005. She holds an AV Preeminent Peer Rating, Martindale-Hubbell's highest rating for ethical standards and legal ability. Laura is a graduate of University of Delaware and received her J.D. from Dickinson School of Law, where she was on the board of editors and business manager for the Dickinson Law Review, as well as to serve on the Appellate Moot Court Board. Laura is admitted to practice in Delaware and the District of Columbia. 31



THOMAS J. [email protected]

Thomas Salerno is a member of the financial restructuring practice at Stinson Leonard Street. He has been involved in restructurings in the United States, the United Kingdom, Germany, France, Switzerland and the Czech and Slovak Republics. In addition, he teaches Comparative International Insolvency at the University of Salzburg. Tom was named as one of 12 Outstanding Bankruptcy Attorneys in 1998 and 2000 by Turnarounds & Workouts, a newsletter published by Beard Group, Inc. in Washington DC, and is a member of the select group of insolvency professionals listed in the K&A Restructuring Professionals Registry. He has been listed in The Best Lawyers in America since 1993 and was selected by his peers for inclusion in Southwest Super Lawyers, a distinction honoring the top 5 percent of lawyers in the region. In 2009, Tom was selected as Best Lawyers’ Phoenix Bankruptcy and Creditor-Debtor Rights Lawyer of the Year and was one of three Arizona-based lawyers to be listed in The International Who’s Who of Insolvency & Restructuring Lawyers. He is rated AV by Martindale-Hubbell’s rating system.

Tom has extensive experience representing distressed companies, acquirers and creditors in financial restructurings and bankruptcy proceedings, pre- and post-bankruptcy workouts, and corporate recapitalizations. He has represented clients in diverse industries such as casinos, resort hotels, real estate, high-tech manufacturing, electricity generation, agribusiness, construction, healthcare, airlines and franchised fast-food operations. He has also served as an expert witness on US insolvency law in litigation in Germany. 32



HOWARD [email protected]

Howard founded Rally Capital Services, LLC in 1998, and continues to serve as its founding member today. He brings a wealth of knowledge and a broad range of experience, having worked as an Internal Revenue Agent and IRS Midwest Regional Division Appellate Conferee (pre-U.S. Tax Court adjudicator), attorney, tax law specialist and trusted strategic business advisor to a variety of operating businesses, commercial lenders and other business professionals.

Howard has structured hundreds of millions of dollars in transactional funding for his clients, including the successful implementation of creditor workouts involving millions of dollars in debt with more than 3,500 creditors and claims ranging from small deals to multi-million-dollar deals. As a paid professional, he has served as Managing Agent to Debtors-in-Possession, Assignee/Trustee in Assignments for the Benefit of Creditors, Court-Appointed Receiver to operating businesses, Liquidating Agent and advisor to business owners, commercial lenders and other professional advisors.

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advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

41