Investing in a distressed company through preferred equity presents unique challenges and risks, particularly when the company is facing financial instability or covenant breaches under its credit agreements. To properly mitigate these risks, preferred equity investors must secure a comprehensive set of legal protections to safeguard their capital and influence the strategic direction of the business.

This article explores four critical rights that preferred equity investors should seek when investing in financially distressed companies. These rights are designed to give investors greater control over the business, mitigate the risks of credit agreement breaches and protect against adverse liability management transactions (LMTs). The rights discussed here include (1) the right to make equity cures under the company's credit agreement, (2) the right to control the board in the event of a credit agreement breach, (3) forced sale provisions and (4) crucial consent rights to protect against LMTs that may erode preferred equity value.