With interest rates at historic lows, and the economy slowly strengthening, leveraged buyouts (LBOs) remain a popular means of corporate recapitalization. Whether initiated by private equity sponsors or company founders and insiders, LBO transactions permit the corporation to reconfigure, streamline and improve its business outside the glare of the public company spotlight. Moreover, LBOs present an opportunity for public company shareholders: sale of their company stock to the LBO sponsors at a premium, without assuming further risk associated with the transaction or the now-private company.
But a spate of recent litigation has signaled that the predictable LBO benefits traditionally available to tendering shareholders may be in jeopardy. Typically, if a LBO results in a near-term insolvency of the subject company, sponsors of the LBO – those primarily responsible for engineering the deal – face potential liability. But now plaintiffs, including the company itself (in the form of a bankruptcy or litigation trustee), as well as individual creditors, have brought constructive fraudulent conveyance claims against the “innocent” public company shareholders who sold their stock in the LBO. These claims allege that, even in the absence of any intent to defraud, by tendering stock in the LBO the shareholder received too much value for their company stock. Accordingly, the theory goes, these shareholders are the beneficiaries of a fraudulent conveyance which the lawsuit seeks to recoup.