During the Internet revolution of the late ’90s, a well-known investor at a “Keiretsu Forum” boldly proclaimed that the division of the Internet landscape was akin to the great land grab of the 19th century. “In two years it will all be over,” he predicted. He was right, but for precisely the wrong reason. Two years later the dot-com bubble had burst, leaving in its wake a shattered economy.
Each of the last three decades has ended in significant recession. The ’80s ended in a downturn caused largely by the collapse of the commercial real estate market. The aforementioned collapse of the New Economy at the end of the twentieth century was spurred by wild speculation in technology companies. Now we have a worldwide recession caused in large part by the credit crisis. Each downturn feels somehow deeper and more troublesome than the last. Yet if history is a teacher this downturn too shall end. The question is how to survive, and even thrive, in this New New Economy. As with many complex problems, there is no simple or single solution. However, a careful analysis of the current landscape and developing a strategy around your company’s assets and liabilities is an important starting point.
Successful Management of Legal Issues in a Downturn
Tough economic times raise difficult legal issues, such as the increased risk of shareholder litigation. As more companies face financial uncertainty, officers and directors must clearly understand their obligations and act accordingly. Officers and directors owe a company and its shareholders due care, good faith and loyalty. Failure to uphold such duties can expose directors to personal liability for damages. This risk is particularly acute for venture capital and other private equity professionals.
In the last major downturn, the courts expanded their definition of creditors. The rationale was that in situations where a company is insolvent or on the brink thereof, such company’s equity is worthless and it is the company’s creditors that bear the risk of poor management decisions. Since many companies that were entirely solvent just months ago now teeter on the brink of insolvency, the risks of serving as a director have increased dramatically.
Directors need to be vigilant in the current environment. First and foremost they need to be candid with themselves regarding whether it is prudent
