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Dividend recapitalizations, involving the issuance of bonds or loans to pay special dividends to equity investors, raise concerns regarding self-dealing and the lack of tangible benefits to company operations. While offering immediate returns to investors, these transactions burden companies with increased debt, potentially hindering growth and leaving them vulnerable to economic downturns.

From a legal perspective, dividend recaps pose risks for investors and directors. Creditors may pursue legal action under fraudulent transfer statutes if the company becomes insolvent post-recap, while directors may face liability for approving dividends without ensuring solvency, as mandated by state laws. 

To mitigate these risks, companies should obtain independent solvency opinions, disclose accurate financial information, and delegate decision-making to independent boards or committees. By prioritizing the company’s interests over personal gain and adhering to best practices in corporate governance, companies can safeguard themselves against potential legal challenges, ensuring that dividend recaps serve the long-term interests of all stakeholders. This approach is expertly detailed in a client note written by my Quinn Emanuel colleagues; you can read the full article here.

Written by:

John B. Quinn