CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
Spotlight (Cont'd)
TABLE 3-3: Potential Pitfalls The following chart illustrates the steps taken by directors of a financially distressed company that was subsequently the subject of litigation.
Corporation
Actions Taken by Directors
Essar Steel Algoma Inc. (2016) 81
– Three independent directors resigned after attempts to create a restructuring committee and engage outside experts were voted down by the board – Remaining directors declined to follow independent counsel’s advice to fulfill its equity commitment – When nearing CCAA filing, a special committee of directors was constituted with external advisers, though the independence and agency of these directors were questioned in litigation – Directors remained in office despite allegations of conflict and concerns about their independence
In successful restructurings, the directors formed special committees to investigate wrongdoing, consider options for continued financial viability or expressly consider the possibility of restructuring. More details about the use and best practices for special committees can be found in Chapter 1, Special Committees: Governance Safeguards for Conflict of Interest Transactions and High-Stakes Situations. These committees usually comprise independent directors and rely on external legal and financial experts. In Essar’s case, its refusal to heed the advice of its independent directors undoubtedly created complications for it. Even after a restructuring committee had been established, Essar was plagued by disputes and litigation questioning the board’s engagement and whether the committee was truly independent. The Essar insolvency should act as a reminder that the timing of decisions and directors’ independence as well as their ability to guide the corporation through uncertain times are key factors to the success of a potential restructuring.
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Davies | dwpv.com
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