Shareholder on Shareholder Violence
21 September 2023
21 September 2023
The United States restructuring market has coined the phrase "creditor-on-creditor violence" recently. It describes the taking advantage of loopholes in financing documents by certain existing or new lenders to the disadvantage of certain existing lenders. But in financially distressed scenarios, there is not only creditor violence but shareholder violence. We are seeing an increasing amount in Australia. So what is it and how should it be handled?
Shareholder on shareholder violence is hardly new. It has been around as long as there have been shareholders. But like any trend, it morphs. What we are seeing in the current market is an increase in disputes in relation to early stage and high growth companies where what could be described as "easier" access to funding has become more difficult and the equity capital markets have re-calibrated value. This creates an inherent tension between a company's need to preserve runway and continue to attract capital (sometimes at a price per share less than that which existing shareholders have bought in at, otherwise known as a "down-round") which can lead to fights between shareholders and inevitably, violence.
Shareholders are looking closely at the performance, cash-flow and future outlook of these businesses to see whether they should continue to invest or whether they cut their losses and seek to exit their investment via a secondary sale, often with a view to deploying funds elsewhere. But exiting an investment is not as easy as it sounds. So how do you manage the exit, and navigate the underlying issues?
Here are 7 tips:
Crisis is opportunity. An increase in shareholder on shareholder violence presents both a threat to guard against and an opening to take advantage of.
Authors: Michael Sloan, Partner; Alinta Kemeny, Partner; Camilla Clemente, Partner; Jason Maletic, Partner; Stuart Dullard, Partner; and Jacqueline Chan, Senior Associate.