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S&C Critical Insights – Fiduciary Duty Conversations During COVID-19: Ways to Save a Business - YouTube
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[Music]
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[Applause]
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hello and welcome to snc critical
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insights
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i'm jim bromley co-head of the firm's
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global restructuring practice
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joining me is andy dietrich who co-heads
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the firm's global restructuring practice
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with me
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and also serves as co-head of the firm's
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greater finance and restructuring group
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today we share our thoughts on board
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fiduciary duty conversations since the
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covet 19 crisis
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including strategies for directors to
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continue taking careful risks
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when confronting the zone of insolvency
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while the pandemic has changed business
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planning discussions
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fiduciary duties of care loyalty and
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good faith remain constant and boards
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can still swing for the fences
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so andy we've been in a lot of board
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meetings over the past couple of weeks
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um and seems like they're never ending
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uh what are the main topics that boards
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are dealing with at the moment
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strategies that they're considering and
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fears that they're facing
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yeah yeah jim so as you know well as i
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do
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we've been giving a lot of fiduciary
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duty talks to boards
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to a lot of boards that didn't think
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they ever would have to hear the
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insolvency fiduciary duty talk
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and that's always an interesting
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conversation with directors
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because the eight or nine years ten
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years since the last financial crisis
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or the end of the last financial crisis
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has seen a lot of innovation and
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delaware
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law about director duties and insolvency
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and we still see as we come into these
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situations a lot of misunderstandings
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right we see those letters from
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creditors that say you oh a fiduciary
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duty to your creditors
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and we see directors and others who
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worry about
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being in the vote zone of insolvency and
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what you know how their duties change in
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that respect
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and as you know you know the most
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important thing to remember for a
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delaware corporation
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that is in financial distress is there
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are no new fiduciary duties
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at all that the same fiduciary duties
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that have always applied to the company
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continue to apply the duty of care the
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duty of loyalty
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the duty of good faith and that's
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sometimes surprising advice
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because people freeze up and they think
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we're in this situation we can't
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take risk anymore we need to shut down
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and you know it's very important to be
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able to put a board of directors in a
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position where they can't take risk
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the same risk they could always take it
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you had a nice phrase once when we were
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on the phone the other day that i
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remember
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where the basic premise of delaware
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corporate law is that the board of
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directors can swing for the fences
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and you can still swing through the
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fences even in this zone of insults
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as long as you do so carefully so we'd
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like to talk not so much about its zone
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of insolvency
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it's kind of building his own safety so
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the board can take the risks that are
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actually necessary to take
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to save a business because a company
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that is frozen up
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is not a company that's going to be able
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to stay out of chapter 11 ironically
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of course there are important
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differences in the zone of this indians
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you know when you're near insolvency
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for the fiduciary duties they're not in
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the substance of the duties themselves
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but they're in two questions about how
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they get enforced so under delaware law
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if a corporation is actually balance
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sheet insult
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then the creditors can bring a
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derivative action instead of
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the stockholders the same derivative
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action the same standard
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duties to the enterprise but the uh the
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creditors can break the action rather
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than stockholders
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and the second thing of course is that
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if chapter 11 ever happens
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the fiduciary duty action belongs to the
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corporation
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and that could be brought by creditors
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could be brought by the estate could end
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up someday in a litigation trust against
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the directors
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and so it's very important to follow the
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same
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best practices that we do for corporate
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governance for solvent companies and
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insolvency
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just to make sure that we build the best
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events but we start with fiduciary
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duties as always
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but the message and this is the most
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important thing the message is you can
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indeed take risk as long as you are
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thinking
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about the downside and have a safety net
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or a contingency plan that's also part
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of your corporate planning
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so there's discussions about how your
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business is reacting to code from a
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liquidity perspective business planning
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discussions
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about how much liquidity you need and
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trying to do the impossible to predict
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your operating cash flow
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then there's discussions with your
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revolving lenders or other sources of
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liquidity among your creditors
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that then determine some kind of what we
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call a ready date
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right or a date by which you may have to
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exercise some kind of
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court protection those discussions can
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keep extending that ready date again and
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again and again
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but establishing that ready date is very
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important and then once you have that
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ready data established
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there's a contingency planning process
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that puts the company in a position
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where
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it needs to it can then use chapter 11.
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but no company ever makes a decision to
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file for chapter 11 until the very last
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moment
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so the parallel processing of this
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exercise is very important
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but the upshot for a board is your
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duties are the same they go to the
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enterprise perhaps not the stockholders
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but they're the same duties
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you can really take risk you can make
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judgments about
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equity versus debt versus liquidity as
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you think
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good faith is in the best interest of
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the company as long as you have
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some kind of a safety net for the worst
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case scenario
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when you run out of money yeah i often
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find that what you're
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dealing with almost more than the
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finances
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is the psychology of the company and the
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management and the board
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accepting that there's issues right it's
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like the five stages of grief
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you know the first is denial and so when
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the restructuring lawyers walk in the
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room at first
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the initial reaction is leave the room
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and we don't want to talk about it and
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you've got to go through bargaining and
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until you get to acceptance right i
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think it's important that we bring
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the boards to that point where they
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recognize that having
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contingency planning isn't a bad thing
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indeed it's a critical thing
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[Applause]
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[Music]
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