A bankruptcy or restructuring team must be put together quickly.
With the world more globally interconnected than ever, even established companies can take an unexpected tumble and be forced into restructuring or bankruptcy in a matter of weeks or months. Could a global recession slice into your business? What about a collapse in your best customer’s industry, or a crippling supplier meltdown? In many cases the corporate secretary will be charged with putting together a team to handle the restructuring or bankruptcy, a process that must happen quickly if the company hopes to survive the crisis.
Speed and readiness is key when dealing with a restructuring or bankruptcy, because these are not events that companies normally plan for in advance. In fact, they are often seen as the ‘last resort’ solution to a fast-moving negative situation – what the lawyers call ‘the zone of insolvency’. When a crisis of insolvency looms, the corporate secretary, board members and other top executives will need to reach outside the company for the appropriate professional advisers to help deal with the problem.
David Sheffey, assistant house counsel and corporate secretary at US Power Generating Company (US PowerGen), has had quite a bit of experience dealing with both bankruptcies and restructurings. He is currently involved in restructuring activities at US PowerGen and was also the assistant corporate secretary for Global Crossing when it filed for bankruptcy protection in 2002. Back then Global Crossing was one of the world’s leading international telecommunications companies, and its bankruptcy filing, which listed assets of $22.5 billion and liabilities of $14.6 billion, ranks as the seventh-largest in US history.
Since each company’s situation is different, planning for a bankruptcy or restructuring must include flexibility. At Global Crossing, for instance, Sheffey experienced the multinational aspect of filing for bankruptcy. The company operated in close to 30 countries, and decisions had to be made on where to file and where not to file. In some cases, new specialized counsel had to be engaged.
This is why Sheffey ranks the external bankruptcy counsel as the most critical partner to the corporate secretary. ‘He or she becomes an integral part of the process,’ he says.
The right stuff
Selecting the right bankruptcy counsel is critical due to the potential breadth of restructuring or bankruptcy activity, Sheffey notes. Simple moves may be quite easily managed with a small team, but something like a multinational presence or other complexities will present greater challenges that require someone with significant skill and experience. ‘You need what I call an air traffic controller,’ Sheffey says. ‘They will have to maintain a checklist and report back to the lead attorney.’
Once the bankruptcy adviser is in place, the next step is finding funding for a deal that will allow the company to continue to operate. This will require an investment banker with experience in restructurings and bankruptcies.
Jeffery Stegenga, managing director with global professional services firm Alvarez & Marsal, says the external adviser on financing will work with internal finance officers, assessing the situation and arranging adequate financial support for the filing. The adviser should then work with the rest of the team to map a path through the process. Stegenga, who chairs his firm’s executive committee for US restructuring and has worked with a range of clients including Chesapeake, Citadel Broadcasting, Visteon, Lear and Blockbuster, says selecting an experienced banker is important because ‘you don’t want a financial adviser who is cutting his teeth on your case.’
The third important area is communications, both experts say. The more complicated the company is, the more likely it is that an experienced outside counselor in corporate communications will have to be engaged. ‘You work with internal communications executives and your management team in order to create the message you want to deliver to your rank and file, to make sure everybody is on the same page,’ Sheffey says. Messaging for other constituencies, such as disgruntled shareholders and creditors, will also have to be addressed.
Silver linings
Restructuring often connotes a negative outcome to the uninitiated, but in reality, getting safely through a restructuring can set a company off in a more positive direction. That said, management can often unwittingly subvert the potential for good, according to Harvard Professor Stuart Gilson, one of the leading experts on the subject and author of Creating value through corporate restructuring.
‘Many corporations recognize the need to restructure too late, when fewer options remain and saving the company may be difficult,’ he writes in the book’s newest edition. It is up to the corporate secretary to guard against such mistakes. ‘The biggest mistake companies make is what I’ll call denial,’ says Stegenga. ‘Nobody has in their business plan an objective of filing for Chapter 11, so they will exhaust every alternative to avoid that.’
Attempting to avoid bankruptcy or restructuring is understandable, but Stegenga says this must be done with the right amount of pragmatism. ‘Absolutely don’t file unless you need to, but you may not be able to outrun the problem,’ he states. ‘The team must have an eye to their fiduciary duty to all of the company’s constituents, and then determine whether filing is appropriate.’
Stegenga also points out that going through contingency processes and doing the preparation can sometimes lead to the discovery of alternatives to Chapter 11. Companies often uncover new ways to deal with business difficulties without going to court, so the preparation becomes an investment that, while not used to file for Chapter 11, nevertheless pays off.
When all is said and done, the centrality of the corporate secretary’s position is clear. ‘Corporate secretaries are going to be scrutinized,’ Sheffey says. ‘They are the ones responsible for recording what is said in the boardroom. They will need to replay it later on, when the court is looking at what occurred. The corporate secretary should work closely with counsel to ensure all fiduciary duties are covered, minutes are taken in appropriate detail, and things are approved when they should be.’
Sheffey concludes by emphasizing that ‘being well prepared will help you to deal with the chaos of bankruptcy. Decisions must happen quickly – on the fly – so have maximum organization.’
