The coronavirus disease (COVID-19) arrived at a time when share buybacks and dividends were at historic highs (and indenture covenants notoriously light). But the pandemic may already have significantly reshaped the landscape for many companies that recently made payments to shareholders in the form of share buybacks, leveraged buyouts, or dividends, or were planning to take these actions before the pandemic began. Given the challenging financial outlook many of these companies now face, such transactions are likely to come under increasing scrutiny by creditors, who may look to utilize fraudulent transfer and other laws to determine whether money distributed by companies to buy shares or pay dividends can be recovered for the benefit of creditors, and whether companies can avoid their obligations to pay competing debt raised to fund such distributions. This article discusses the key issues that creditors, companies and their sponsors, and lenders should consider when assessing distributions to shareholders that may be contemplated going forward, and those that have already been completed.
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