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By: Dominick P. DeChiara, Winston & Strawn

Over the past six weeks, control-oriented private equity funds have been hunkering down with their portfolio companies in light of the COVID-19 pandemic. Any and all tactics have been considered and implemented in order to preserve liquidity, including drawing under existing revolvers, working with lenders for relief, taking advantage of loans and tax relief opportunities under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) (if and to the extent available or even implemented at this time) and operational cash management with customers, landlords, and suppliers.

Despite these efforts, if the global pandemic continues and/or if business does not bounce back quickly enough, many portfolio companies may need additional capital to keep operating. After exhausting all other remedies, Sponsors with dry powder may have to inject additional capital in order to protect their investments at a time when valuations are lower than prior financings.

Sponsor-led down round equity financings come with particular risks that need to be considered, especially in situations where the Sponsor controls a portfolio company with many minority investors. If proceeding down this path, we recommend Sponsors keep in mind the following:

Fiduciary Duties. First and foremost, review the governing documents to confirm whether fiduciary duties apply to directors and controlling equityholders. Although fiduciary duties......................

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