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INSIGHT: Overcoming Five Challenges to Successful Corporate Restructuring

May 7, 2020, 8:01 AM

It should come as no surprise that, during this market downturn, corporate restructuring attorneys now find themselves swamped with new engagements and information requests from clients to advise on new strategies for sustained or renewed viability.

Although retail, travel and energy are among the industries seemingly hit earliest and hardest by the Covid-19 pandemic, no sector will be left untouched. However, restructuring often provides companies experiencing financial distress with an opportunity to breathe, reassess, and ultimately pivot towards a healthier balance sheet.

The most effective restructuring plans are almost always those developed with sufficient lead time to enable organizational agility. As such, the early—and almost immediate—response of many companies to engage their legal advisers for counsel is encouraging. This typically allows for greater creativity and more options in developing a plan for reinvigoration.

Regardless of the restructuring strategy selected, there are a handful of challenges businesses should expect to address.

Overcoming Challenges

First, restructuring involves the coordination of at least dozens, if not hundreds, of stakeholders. Trying to align debtor and creditor expectations with an eye towards compromise against significantly accelerated timelines requires tenacity and focus.

Coordination among stakeholders has become even more complicated in recent times, as 97% of dealmakers report they are now working virtually from home or remotely while sheltering in place, according to Datasite research. Legal and financial advisers must now adapt largely analog restructuring playbooks for what has become a primarily virtual world. Site visits, client meetings, credit negotiations, court appearances, and other activities that often rely heavily on in-person interaction to deliver an informed point of view for decision making must somehow be effectively facilitated online.

Second, regulatory considerations for restructurings are notoriously complex even if there is only a single legal jurisdiction at play. However, many restructurings today are cross-border in nature, which means experts will be engaged to advise across all relevant locales. Similarly, in the age of GDPR and CCPA, this also requires meeting compliance thresholds for how consumer information is gathered and stored.

This brings us to our third challenge: data storage and information sharing. Restructurings are document intensive. Companies must gather a myriad of contracts—leases, vendor agreements, and loans to name a few—and share them with multiple advisers for review and further action.

Although all financial transactions are time sensitive, this is particularly true with restructurings. Debt financing, divestitures, carve-outs—these are all business strategies developed with an expectation of rapid results. With 50% of dealmakers expressing concern about loss of productivity and collaboration while working from home, prudent planning requires deep thought on how information will be shared and the productivity tools used for its review.

Fourth, the importance of developing an effective human capital management plan cannot be underestimated. In times of uncertainty it is not uncommon to see higher employee turnover. Unfortunately, this includes the flight of key talent. This means employees are leaving with critical institutional knowledge relevant to both the restructuring proceedings and, potentially, future performance of the company.

Safeguards need to be implemented to ensure knowledge transfer and retention. The proliferation of layoffs and furloughs along with robust dialog around executive compensation recently will continue to place increased emphasis on labor and employment considerations throughout the restructuring process moving forward.

Finally, corporate lawyers should be ready to assess the likelihood of a greater threat of litigation against clients within the scope of their restructuring charters. The pandemic has been disruptive to every community’s way of life. As people recalibrate and seek a return to “normal,” we should expect to see an increase in legal action, including class action lawsuits, across sectors.

Early Action Yields Positive Returns

With almost 60% of global dealmakers convinced the current slowdown will last longer than seven months, it’s imperative to begin restructuring conversations now. Headwinds will continue for the foreseeable future.

Dealmakers who develop plans which take into account these challenges will likely be rewarded with more streamlined collaboration, increased productivity and, hopefully, faster turnarounds in business performance. Together, companies and consumers have successfully navigated market challenges and recessions in the past. We will rise to the challenge and persevere once again.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rusty Wiley is CEO of Datasite, formerly known as Merrill Corp., a leading SaaS provider for the M&A industry, empowering dealmakers around the world with the tools they need to succeed across the entire deal lifecycle.