Minimizing the Risk of Fraudulent Transfer Avoidance: A Good-Faith Solvency Opinion as the Shield to Protect a Leveraged Transaction
Posted: 20 Jul 2016
Date Written: July 19, 2016
Avoidance of leveraged transactions as fraudulent transfers has proliferated in the aftermath of the recent financial crisis and during the resultant economic recession. When planning leveraged deals, such as buyouts, spinoffs, and intercorporate guarantees, corporate boards rely on solvency opinions prepared by outside financial advisors. If a leveraged transaction is challenged in court by a shareholder, the business judgment rule provides a highly deferential standard of judicial review of corporate decisions, as long the decision was well-informed and not tainted by fraud, illegality, or self-interest. If the same transaction is subject to fraudulent transfer avoidance, courts routinely employ a probing analysis, informed by 20/20-hindsight and according no deference to directorial decision making. Highlighting the irreconcilable discrepancy in the standards of judicial review, this Article argues that under the current legal regime the most reasonable solution from a planning perspective would be to structure the leveraged deal in reliance on a good-faith solvency opinion procured from an independent expert. This Article reviews examples of post-financial crisis avoidance actions, identifies the most frequently recurring legal criticisms of solvency opinions, and provides tips for ensuring that the solvency opinion obtained contemporaneously with the transaction will minimize risk of avoidance in the future.
Keywords: Fraudulent Transfers, Fraudulent Conveyances, Avoidance, Leveraged Transactions, Insolvency, Solvency Opinion
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