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Don't Pay Old Equity That Is Truly 'Under Water'!

By Michael J. Sage and Mark E. Palmer
August 15, 2003

As discussed last month, the law clearly shows that parties structuring cash-out mergers with distressed debtors must focus on two things: 1) timing the debt-for-equity exchange (and the resultant debt cancellation) so not to occur prior to the merger's effective time, and 2) demonstrating that the debtor was at 'the brink of bankruptcy' at the merger's effective time. A clear record should be built and maintained on these points, and the structure should accommodate the technical legal requirements.

Our own practical experiences show that, by following the steps we have outlined below, counsel can prevent inadvertent and significant payments to holders of equity assumed to be 'under-water' ' ie, more to the point, lawyers can reduce the risks that their clients will pay twice for the company's equity.

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