Beginning with the second quarter of 2007, the financial markets began to change dramatically. Those changes have led to a substantial increase in restructurings and bankruptcies. But this time around, the face of restructuring looks very different than it did in the last cycle. Most companies facing restructuring or bankruptcy today are doing so not because of high legacy costs or because labor is cheaper elsewhere. Instead, the causes for the bulk of current restructurings are highly leveraged balance sheets and very limited available capital. Many companies today find themselves heading toward a restructuring in an uneasy partnership with hedge fund investors who provided this leverage in the first instance.

Hedge fund investors generally sit at various levels of a company’s capital structure. By the nature of who they are, hedge fund investors often have substantial influence on the direction of the business. In fact, their investments are often made to support a specific business plan and include checks and balances to make sure that the company executes that business plan. In a restructuring, these hedge funds may also provide a solution for problems facing the company. After all, they have additional capital that could be brought to bear on the situation and, in many cases, they stand to take a loss if the restructuring is not completed successfully. The inclusion of this new type of investor in the capital structure places tremendous pressure on the exercise of traditional fiduciary duties by directors in today’s restructurings.

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