Restructuring and Workout

When a business relationship require changes, the parties typically seek a negotiated solution before heading for the courts or arbitration process. Changes may be needed to overcome “failures” that might arise for many reasons. Misunderstandings that bloom into accusations are often due to fault on both sides. The contract might not have contemplated a particular scenario.
Restructuring may be needed, even where there is no “failure,” due to major changes in either party’s business or operations. Often, a merger or acquisition, or a change in senior management, results in a radical review that questions the value of the relationship and even the suitability of continuing with the particular form of sourcing activities.

Factors Favoring Restructuring
“Restructuring and workout” occur when both parties decide to seek such a negotiated solution. Conditions favorable to a restructuring or workout should be gauged in advance:

  • Type of Failures: the failures to achieve the contracted levels of performance:
    • were not due to bad faith, misrepresentation, fraud or gross negligence by one party, which would be easy to prove in court and therefore easy to pursue via litigation; and
    • might have been shared by each party from inception;
  • Attitudes of Management: the senior management of both parties:
    • understands the roots of the dispute over performance and appreciates, where applicable, the possibility that both sides might have contributed materially to the misunderstanding;
    • has demonstrated leadership by instructing middle managers to pursue negotiations (but without waiving any right to sue);
    • has sufficient trust and confidence in the capabilities and willingness of the counterparty to resolve the dispute equitably;
    • appreciate the potential negative impact of the rights and interests of third parties such as regulators, shareholders and other stakeholders in the restoring the relationship.

Structure of a Workout
A “workout” or “restructuring” starts with an assessment of the problems, the possible solutions and the needs and willingness of the parties to review the relationship. In many cases, the adjustment might merely be a “fine tuning,” but in other cases a major revision can occur.

Possible tools for a workout cover the full range of possible economic and legal relations, such as:

  • an extension of time for the deadline for completion of a milestone, a task, a transition, a payment or a mutual agreement on a work order;
  • an extension of the term of the agreement;
  • an extension of the statute of limitations;
  • a waiver of some limitation, such as a prohibition on subcontracting;
  • a price adjustment;
  • an enlargement or contraction in the scope of work;
  • the addition of new service requirements;
  • a change in the risk allocations for purposes of liability to each other and to third parties;
  • changes in the warranties and representations;
  • additional indemnifications;
  • a shift in the roles and responsibilities of the parties;
  • an assignment of the agreement; and
  • new planning for exit procedures.

Each of these tools constitutes a change in original choices from the original negotiation framework.

Legal Value of a Workout
A “workout” or “restructuring” can be absolute or conditional. In an “absolute” restructuring, the parties put their past differences to rest and may exchange limited releases of claims. In a conditional restructuring, the release of claims is contingent upon completion of new performance or payment obligations.

The Workout Team
The teams assembled to conduct the workout might include the original negotiators and the original team. This approach provides continuity.

A new team would apply a de novo approach, examining all original assumptions and documentation. Generally a wholly new team might be used because all the original participants were not available. Reliance on a wholly new team results in a loss of the original “intent” behind the relationship but may be appropriate, if supported by suitable top-level executives, to remove personality conflicts.

For a successful restructuring, the “workout” or “restructuring” team on each side needs experienced business executives, managers, financial analysts, relationship managers and legal advisors.

If you have questions about this process, please feel free to contact us.