Protecting your equity in distressed investments

What matters

What matters next

From recovering after a global pandemic to the war in Ukraine, the collapse of Silicon Valley Bank to soaring inflation, and supply-chain delays to employee shortages, businesses across all sectors are coming up against a number of operational and liquidity challenges in current market conditions. Despite these challenges, we have seen confidence and resilience across all sectors with investment from seed to IPO.

But what happens when your investment starts to show cracks under pressure and what can you do to manage the process? 

For an equity investor, early detection and action is absolutely key because experience shows the earlier a distressed business gets professional help, the more likely it is to survive and prosper in the future. With all insolvencies, the value of the business is likely to ‘break in the debt’, leaving no return to shareholders. It is therefore particularly important that equity investors are informed and proactive in seeking the tools and advice needed to protect a company’s solvency and liquidity as soon as any flags start to show. 

Investor Directors & a changing landscape

A member of the board is a powerful tool for an investor in shaping the future success of a business. This may never be more useful than when a company starts to show signs of financial distress. The board’s access to company information should be unfettered, and they should be the first to identify potential signs of distress and deal with them head-on. However, as a business starts to show signs of distress, the duties of its board of directors transition – on a sliding scale – from a duty to promote the success of the business for the benefit of its shareholders to an overriding duty in favour of the company’s creditors. All directors must remain alive to this, but, once this balance has tipped investor directors must tread very carefully in respect of which of their hats they are wearing when decisions are made.

 

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Further information

For a more detailed advice note on responding to signs of distress in investments, please see our full note here:

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Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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