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3 Ways Attys Can Play Defense When Capital Markets Slow

11 February 2016

Capital markets work is a long game that requires attorneys to skillfully navigate downturns and embrace the behind-the-scenes work that can keep their clients out of hot water and position them for prosperity when market sentiment puts them back on offense.

While it isn't as glitzy as guiding multibillion-dollar initial public offerings, attorneys say the work done between megadeals fills needs critical to the success of their clients. That work can be as varied as reviewing companies' disclosures to ensure they are updated to reflect current market conditions and counseling them on alternative transactions that may have appeal in lieu of robust public markets — all while continuing to prepare for potential IPOs so issuers are well-positioned when investor sentiment rebounds.

"We go from offense to defense a little bit," said Spencer Feldman, a partner at Olshan Frome Wolosky LLP.

Here, Law360 looks at three key challenges capital markets attorneys can help their clients overcome during market dips.

Keeping Disclosures Updated

Every public and potentially public company must keep disclosures updated to the satisfaction of regulators and potentially litigious investors, regardless of market conditions.

But attorneys say the downturn might require some companies, such as pre-revenue businesses in the life sciences industry that are heavily dependent on capital markets funding just to survive, to take a second look at their disclosures in light of current conditions. Such companies should review risk factors in their prospectus — or in the case of publicly traded firms, in the management discussion and analysis section of their annual report — as well as in their earnings guidance and press releases to make sure that information about liquidity and capital resources is still accurate.

"Down markets definitely have an impact on their liquidity and capital resources," Feldman said. "Lawyers have to be careful to help these companies make the proper disclosure so they don't get into trouble."

Shearman & Sterling LLP partner Alan Seem said if a company believes that market conditions could affect its ability to raise capital needed for operations or planned expenditures, it should consider flagging that risk for investors. Plus, precipitous stock drops, increasingly common in the current market, can quickly prompt scrutiny from aggrieved shareholders and their lawyers.

"Bad markets can definitely expose you to litigation risk, particularly in the case of a sudden and significant price drop," Seem said. "In such a case, plaintiffs counsels will often sue first and try to build the case later. But the damage will have already been done."

Keeping disclosures updated is a timely topic because existing public companies and potential public companies are currently updating their annual reports and IPO prospectuses to include year-end and fourth-quarter information.

"You will see, particularly with companies that are dependent on the capital markets, updated disclosures that reference the market conditions," Kirkland & Ellis LLP partner Dennis Myers said. "The capital markets were not terrific in December and that has continued in January."

Pursuing Other Paths

As the downturn makes conventional forms of capital-raising from public markets more expensive, companies might pursue opportunisitic moves that will improve their capital structure and better position themselves for recovery.

Those options can include stock repurchases in which companies with cash on hand buy back their own stock, presumably after prices have dipped, in hopes of snapping up bargains and setting the stage for a rebound that will boost shareholder value later. Seem said companies planning stock repurchases must be careful not to trigger tender offer rules, which invite more regulatory scrutiny.

Companies may also consider debt repurchases as well as more complex debt-exchange proposals designed to extend maturities during times when easier refinancing options are less available, Myers said. Such transactions often require an existing analysis of a company's existing debt instruments and other legal factors before proceeding.

Despite the tighter capital markets, Myers noted, an array of viable options exist in the current climate, which shouldn't be compared to the harsher circumstances of 2008, when companies needing to refinance debt worried that markets could potentially close altogether.

"There is no question financing transactions is more challenging than it would have been at this time last year," Myers said. "But at the same time it's not as if it's prohibitive."

Maintaining the IPO Motor

Even as fewer companies go public — there have only been four IPOs, all biotechs, year to date — attorneys note that preparing an initial public offering with the U.S. Securities and Exchange Commission is a monthslong process that firms should embrace in any event. That way their clients are ready to pull that trigger when the market mood shifts.

"You never know when that market window is going to reopen," Seem said. "It's not until the end of the SEC process when the company and the bankers need to make the decision whether to publicly file and launch the roadshow or not."

For their part, prospective companies are not shy about joining the pipeline. While most companies eyeing public markets are remaining on the sidelines given the current volatility, 19 companies have filed IPOs since Jan. 1, according to IPO researcher Renaissance Capital.

In addition, an undetermined number of companies have privately filed IPOs. The Jumpstart Our Business Startups Act of 2012, or JOBS Act, allows companies to file IPOs confidentially so long as they publicly reveal their plans 15 days before launching a roadshow.

While the timetable for existing companies in the pipeline is uncertain, attorneys are bracing for better days.

"The IPO market is somewhat fickle," Myers said. "It requires a significant lead time in order to be ready to go for when the market returns. For sure, we are not busting at the seams. But we have more IPOs in progress than you might otherwise think if you just looked at the market today."

Dennis M. Myers, P.C.

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