A common myth is that when two parties are dealing at arm’s length there is no such thing as “too good of a deal.” This view ignores the laws relating to solvency.
If a transaction is done while the seller is insolvent or the seller becomes insolvent as a result of the transaction, then there can be “too good of a deal” and that deal can be undone – even years after it closes. The law which explains this rule, some of which is captured in Section 548 of the Bankruptcy Code, is the law of fraudulent transfer.
Fraudulent transfer exposure can be devastating because civil liability can be imposed without moral fault on the part of the person being sued for recovery and the look-back period can extend up to six years. No actual fraud or normative wrongdoing is required. Civil liability can result simply from having benefited to the detriment of the other party’s creditors where, at the end of the day, there are insufficient assets to satisfy the claims of such creditors.
Fraudulent Transfer occurs when:
- A transaction (or other corporate event – such as a dividend or other distribution or even an arm’s length sale for inadequate consideration) results in the counterparty receiving a benefit at the expense of unsecured creditors; and
- The company (i) at the time of the transaction is insolvent (i.e., the fair value of the company’s assets are less than the company’s liabilities), or (ii) after giving effect to the transaction, the company either (a) is unable to repay its obligations as they become due or (b) has unreasonably small capital to continue its business.
The recent explosion in dividend recapitalization transactions is responsible for the great increase in the number of Solvency Opinion engagement for our professionals. Other transactions where Solvency Opinions are sought by fiduciaries and by financing sources include:
- Equity buyouts
- Refinancing existing debt
- Business combination requiring a new level of debt
THE BENEFIT OF INDEPENDENCE
To be effective, a Solvency Opinion needs to be able to pass judicial muster. Make sure the firm engaged to provide the Solvency Analysis and Solvency Opinion is not relying on the closing of the subject transaction for any part of its fee. Solvency advice from an independent financial advisor can assure a board and its’ stakeholders that the decisions made by the board are fair and reasonable.
This is a brief overview of Solvency Opinions. For a more detailed explanation, please review our Solvency Opinion Guide.
Marshall & Stevens is a Independent Solvency Opinion Firm and has been in the valuation business for 90 years and has substantial experience in rendering Solvency Opinions in a wide variety of matters. Employing a high degree of thoroughness and diligence, our professionals bring insight from backgrounds in valuation, law, investment banking, and accounting. Our teams are responsive, nimble and know how to keep the project moving in order to meet the timeline that the transaction requires.
Marshall & Stevens is the independent Solvency Opinion Firm known for meeting important transaction deadlines as this recent project shows: