When a company is on the verge of closing a major transaction, bankruptcy is the farthest issue from everyone’s mind. The excitement of launching an entrepreneurial or financial endeavor can make it seem unnecessary to worry about worst-case scenarios. Many companies rely on their regular transactional attorney to structure, negotiate and draft documents and only think of hiring bankruptcy counsel when a bankruptcy is imminent or unavoidable (and sometimes not even then).[ But what if your counsel could do both, at no extra cost. Your lawyer could add real value to any transaction.]
The recent downturn provided many examples of unintended consequences and risks related to transactions scrutinized in bankruptcy that could have been avoided. From guarantor liability to loss of mechanics’ liens – from issues relating to perfection of security interests to expensive litigation, all can be dealt with or mitigated as part of the original structure. negotiation and documentation of a transaction.
For any company that ends up in bankruptcy court, whether as a debtor or creditor, the consequences of not understanding and preparing for those risks up front can be truly be devastating. Not to mention expensive.
In addition to mitigating risk, understanding the rules in bankruptcy can add strategic alternatives to a transaction from the beginning. Potential avenues of flexibility can be built into the transaction documents up front to provide companies with advantages in the event of any later bankruptcy, whether they are the debtor or the creditor. The identification of these opportunities may also help add leverage to any pre-bankruptcy negotiation. This is especially true since the number of those kinds of attorneys is very limited – and likely the attorney on the other side will not have that same knowledge.
When hiring an attorney who understand bankruptcy as well as transactional work — both boom and bust — to do a company’s transactional work and to help a company structure a transaction properly is the smartest way to ensure that the company’s interests will be protected from the outset, no matter what the ultimate consequences prove to be.
Make sure that your company has taken advantage of every opportunity and strategy in its favor and understands all of the lessons that the recent downturn has taught. The truth is that it takes years and years of transactional experience and deep involvement in bankruptcy to become both proficient and efficient in issue spotting and resolution. Moreover, being able to assess bankruptcy risks and advantages in a manner that is useful to a company at the earliest stage is akin to an art form. Hiring an attorney who has been through multiple transactions from the cradle to the grave gives your company a tactical advantage from the beginning, superior knowledge and negotiating leverage as well as mitigation of risk.