A signature element of many leveraged buyouts is that the target company incurs debt to effect the transaction while receiving limited benefit from the borrowing. The debt proceeds are used to pay the seller. Those characteristics set the stage in the event the leveraged buyout fails for creditors or their representative in bankruptcy to challenge the transaction and attempt to clawback the sale proceeds or, in bankruptcy vernacular, avoid the transfer.

In stock sale transactions involving public shareholders, creditors fail in their attempted clawback of sale proceeds due to the growing precedent confirming that the safe harbors set forth in the Bankruptcy Code override the avoidance powers and preemptively defeat such actions. Those precedent, properly understood and relied upon, should also serve to insulate a “spin -off” by a publicly held company to its public shareholders in the event the former parent fails and seeks bankruptcy. The Bankruptcy Code limits the relevant look back time period to two years and even then, only for actually fraudulent transfers.