Private Equity Alert

May 2009 Recalibrate Your and Your Management Team’s

Weil News Thinking to Meet Today’s Challenges n Glenn West and Sara Duran By Glenn D. West ([email protected]) received a Burton Award for legal writing for their article "Reassessing the Consequences The current economic environment has put stress on traditional approaches to of Consequential Damage Waivers business decision making; and the legal advice that private equity professionals in Acquisition Agreements" need to assist them in making rational business judgments in this environment is n Weil Gotshal received the IFLR fundamentally different than the legal advice they need in a more favorable America Private Equity Deal of economic environment. Accordingly, private equity professionals need to recali- the Year award for our work on brate their thinking to adapt to the changed circumstances now confronting the Advent International’s acquisition portfolio companies for which they are responsible and seek reliable legal advice of Dominican airports manager that has similarly been recalibrated. Aeropuertos Dominicanos Siglo n Weil Gotshal advised Advent Recalibrated thinking can enable private equity professionals to add significant International in connection with value to the business decisions required to be made by their portfolio companies’ its acquisition of a 51% stake in management teams. Indeed, focused, “recalibrated” advice to a management team the processing solutions business of Fifth Third Bancorp may ensure the continued viability – or the successful turnaround – of a portfolio company facing financial stress. Outlined below are just a few of the ways in n Weil Gotshal advised Aleris International (a portfolio company which private equity professionals should recalibrate their thinking to assist their of TPG Capital) and affiliated portfolio companies in today’s economic environment. debtors in connection with their n $1.61 billion debtor-in-possession Replace Blind Contract Compliance with Efficient Contract Compliance. financing Most corporate cultures are appropriately compliance-oriented: “Perform your n Weil Gotshal advised The Seafood agreements and avoid any breach.” While complying with the applicable law Company (a portfolio company remains the operative watchword in any situation, your portfolio company may of Lion Capital) in connection need to rethink the wisdom of strictly complying with all of its contractual with its acquisition of Pinneys of obligations. Too often, a company facing a crisis continues to perform under an Scotland onerous contract without considering the possibility that a review of that n Weil Gotshal advised Summit contract may reveal opportunities for an “efficient breach”; i.e., a situation in Partners in connection with an which not performing and bearing the consequences of the breach may actually equity investment in FleetCor Technologies to finance FleetCor’s be less costly than performing and avoiding the breach. The law of contract in acquisition of Corporate Lodging most cases compensates non-breaching parties for the breaching parties failure to Consultants perform, but does not compel performance. While considering such a review may be counter-cultural, conducting such a review may be a prudent, cost saving and fiducially responsible exercise, even after taking into account the cost of any outside counsel necessary to confirm that the consequences of a particular breach will indeed be “efficient.”

n Get a Second Opinion to Make Sure There Really Is a Crisis. Most people diagnosed with a serious illness would obtain a second opinion from another doctor before undertaking an aggressive course of treatment prescribed by the

 Private Equity Alert May 2009

doctor who made the diagnosis. portfolio company’s board and its n Act While You Still Can. Businesses Yet, many portfolio companies officers if there is an insolvency or tend to delay acting on a foreseeable pursue irrevocable courses of action bankruptcy. Too often counsel was crisis until it has matured into an based on their long-term, local not consulted in obtaining the actual current crisis. At that point, counsel’s assessment of their policy or any endorsements thereto. actions that the businesses could options in what has been deter- Review your D&O policies well in have taken in anticipation of, or to mined to be a crisis situation. advance of a crisis. potentially avoid or soften the Before you decide that your impact of, the crisis are simply portfolio company defaulted on Recalibrated thinking interesting theoretical “what ifs.” A that credit agreement or bond classic example of this is undrawn indenture and has no choice but to can enable private equity lines of credit. Lines of credit are seek a costly consent, pay a little professionals to add significant there to provide liquidity when extra and seek another opinion needed. So, if there is no current value to the business decisions from a law firm that specializes in need for the cash, the conventional that area. You may be surprised to required to be made by thinking goes, there is no need to learn that the company’s diagnosed their portfolio companies’ tap the line. After all, why pay serious illness was seriously interest on funds sitting in an misdiagnosed. management teams. account drawing no or negligible interest in comparison? The n Conduct a Documentation Audit. problem with this conventional When a crisis hits, it is too late to n Plan for Crisis. A crisis, by thinking is that it needs to be get the missing signature page or definition, is an extraordinary, recalibrated in challenging times. the promised collateral that a major event (or even perception) For example, many lines of credit counterparty has committed to that threatens the ongoing viability require, as a condition to their being provide. Too often, in the middle of of a company. A challenge drawn, that the company’s chief a crisis, when legal documents threatens the same consequences, financial officer certify that no matter the most, it is discovered but is mitigated by planning and material adverse change has occurred that they don’t do what your foresight that prepared the respecting the company since a portfolio company’s management company to deal with the situation specified date. While the company’s or you believed they did. Most in a way that gave it prospects to chief financial officer may be times courts really do enforce actually avert the situation’s confident making that certification agreements as written, so making escalation into crisis. Planning for today, has he or she considered uninformed assumptions about the crisis requires taking stock of the whether he or she would be content of those documents can business arrangements that could be confident making that certification yield very serious consequences. So, affected by adverse financial when the money is actually needed? conduct a documentation audit and developments. For example, are n make sure there are no surprises Make Sure You Preserve Your Cash there cross defaults or ratings lurking in the company’s material – You Will Need Cash for Almost triggers? What potential covenants agreements that can exacerbate the Anything You Want To Do, could be implicated by your Including Filing a Bankruptcy or magnitude of any ensuing crisis. portfolio company’s most recent Insolvency Proceeding. It is a Never assume that what you or your projections, and when might your popular misconception that filing portfolio company’s management portfolio company “hit the wall?” insolvency or bankruptcy think the agreement says is actually What are the company’s “must proceedings is a result of the what it says or means. have” arrangements, as opposed to company effectively having gone n Review Existing D&O Policies. An the ones they have but wish they broke. If your portfolio company audit is equally important in the didn’t? Are there actions that the has in fact gone broke, bankruptcy D&O insurance arena. Policies company can take now that will or insolvency proceedings may have obtained on advice of brokers at the lessen the impact of a crisis later? little benefit. It actually takes cash lowest prices may lack important Failure to plan for a possible crisis is resources to navigate through a endorsements that could seriously the number one mistake that bankruptcy or insolvency proceeding affect the value of the policy to the businesses make. effectively and successfully. Make

Weil, Gotshal & Manges llp  Private Equity Alert May 2009

sure your portfolio company doesn’t or insolvency proceeding (which wait until their cash resources are can include “prepackaged,” or “pre- exhausted to consider their restruc- negotiated” Chapter 11 plans or turing alternatives. asset sales, as well as an out-of- court restructuring in the face of n When Others Have a Liquidity the possibility of a court filing) can Need, Cash May Be Worth More be a means of effecting a trans- Than Face Value. Conventional action that is beneficial to the thinking is that cash is cash. If I constituencies to whom the board owe $100, I need $100 to pay that of your portfolio company may be debt. If your portfolio company’s accountable and which could not counterparty is facing a liquidity otherwise be consummated. need, however, an offered Recalibrating your thinking allows prepayment of cash at a discount to for the possibility that a the face liability may generate more bankruptcy or insolvency interest that they might otherwise proceeding of a subsidiary, for have imagined. This may be the example, may actually be beneficial ideal time for your portfolio overall to the company. Equally companies to use the market important, planning for such a discounts available to de-lever or contingency makes your thinking buy their way out of bad deals. much clearer on how to avoid it, and may lead to an understanding of how n Planning for a Possible specific decisions may bring you closer Bankruptcy or Insolvency to or further away from it. Proceeding is Not Necessarily Conceding Defeat and Does Not The space provided for this article did Thereby Become a Self-Fulfilling not allow for a complete list of all of Prophecy. Normal thinking is that the ways in which private equity bankruptcy or insolvency professionals should recalibrate their proceedings are an end-of-the- thinking to meet today’s challenges. world scenario. Although they But remember that recalibrating your may well be a last resort for the and your management team’s company itself, they can thinking requires you to focus on sometimes provide significant what is possible, not just what has benefits. Moreover, a bankruptcy always been done.

Weil, Gotshal & Manges llp  Private Equity Alert May 2009

Beijing Steven Xiang Back Issues of Private Equity Alert are available online at www.weil.com +86-10-8515-0558 Boston Recent Articles: James Westra Addressing Liquidity Issues Through the Secondary Market +1-617-772-8377 Budapest De-Levering Portfolio Companies Through Debt Buybacks – US and UK Perspectives David Dederick Treasury Secretary Geithner Presents Framework for Regulation of Private Investment +1-361-302-9100 Funds Dallas Glenn West Deleveraging the Portfolio Company – Stimulus Legislation Provides Tax Relief +1-214-746-7780 The Hedge Fund Transparency Act: More Than It Seems Frankfurt Too Clubby? Gerhard Schmidt +49-69-21659-700 Fear and Greed Hong Kong European Regulatory Initiatives Affecting Private Equity Sponsors and Hedge Funds Akiko Mikumo +852-3476-9008 Buying Assets out of Bankruptcy in the US and the UK Peter Feist Breaking Up Is Hard To Do − and Must Be Done Carefully +852-3476-9100 London Round Up the Usual Suspects Michael Francies A Modest Proposal by the Fed +44-20-7903-1170 Marco Compagnoni Knee-Deepening Insolvency +44-20-7903-1547 Happy Birthday Mr. Borrower Munich Gerhard Schmidt China’s Private Equity Landscape +49-89-242430 In the PIPEline New York Thomas Roberts SPACs – Exit Opportunities for Private Equity Sponsors? +1-212-310-8479 District Court Dismisses Antitrust Suit Against Private Equity Bidders Barry Wolf +1-212-310-8209 Ignorance of the FCPA Is No Excuse Doug Warner PBGC Ruling Extends Control Group Liability to Private Equity Fund +1-212-310-8751 Paris David Aknin +331-44-21-9797 Prague Karel Muzikar +420-2-2140-7300

Private Equity Alert is published by the Private Equity Group of Weil, Gotshal & Manges LLP, Providence 767 Fifth Avenue, New York, NY 10153, +1-212-310-8000. The Private Equity Group’s practice includes David Duffell +1-401-278-4700 the formation of private equity funds and the execution of domestic and cross-border acquisition and investment transactions. Our fund formation practice includes the representation of private equity Shanghai fund sponsors in organizing a wide variety of private equity funds, including buyout, venture capital, Steven Xiang distressed debt and real estate opportunity funds, and the representation of large institutional +86-21-6288-1855 investors making investments in those funds. Our transaction execution practice includes the Silicon Valley representation of private equity fund sponsors and their portfolio companies in a broad range of Craig Adas transactions, including leveraged buyouts, merger and acquisition transactions, strategic investments, +1-650-802-3020 recapitalizations, minority equity investments, distressed investments, venture capital investments Warsaw and restructurings. Pawel Rymarz Editor: Doug Warner ([email protected]), +1-212-310-8751 +48-22-520-4000 Deputy Editor: Michael Weisser ([email protected]), +1-212-310-8249 Washington, DC Robert Odle +1-202-682-7180 ©2009. All rights reserved. Quotation with attribution is permitted. This publication provides general information Wilmington and should not be used or taken as legal advice for specific situations that depend on the evaluation of precise factual circumstances. The views expressed in these articles reflect those of the authors and not necessarily the E. Norman Veasey views of Weil, Gotshal & Manges LLP. If you would like to add a colleague to our mailing list or if you need to +1-302-656-6600 change or remove your name from our mailing list, please log on to http://www.weil.com/weil/subscribe.html or e-mail [email protected]. www.weil.com

Weil, Gotshal & Manges llp