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The current economic downturn has resulted in a huge number of bankruptcy filings by publicly traded companies. During 2001, for example, a record 257 publicly traded companies filed for bankruptcy. The telecommunications sector was particularly hard hit, as 14% of those bankruptcies were filed by publicly traded telecom companies.

Insurance companies, like any other segment of today's fragile economy, have shareholders, creditors, insureds, and regulators to whom they are answerable. They are hardly immune from the ups and downs of so-called new economy companies, nor the more time-tested old economy companies. As such, what is the likely result from a jurisdictional and regulatory standpoint of an insurance company seeking relief by the filing of a bankruptcy proceeding?

In certain cases, a company may seek to exchange its outstanding debt for equity while also extinguishing (or 'squeezing-out') the interests of some or all of its prior shareholders. The need to reduce or eliminate shareholders typically stems from perfectly valid business reasons, including a desire to avoid becoming a reporting company under federal securities laws, to limit ongoing obligations to many small shareholders or to change the equity sponsor. In addition, the parties may seek to effect the transaction 'out-of-court' due to a perception (or the reality) that bankruptcy proceedings would take longer or damage the business.

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Recent rulings of importance to you and your practice.

Features

<i>Ed. Note: One would expect law firms to consider it beneath them to deliberately have staff members ' or those of an ancillary business ' use illegal software copies. But the potentially high cost and embarrassment that can result from even tacitly permitting violations of software licenses should merit proactive attention by firm management.</i>

As discussed last month, the law clearly shows that parties structuring cash-out mergers with distressed debtors must focus on two things: 1) timing the debt-for-equity exchange (and the resultant debt cancellation) so not to occur prior to the merger's effective time, and 2) demonstrating that the debtor was at 'the brink of bankruptcy' at the merger's effective time. A clear record should be built and maintained on these points, and the structure should accommodate the technical legal requirements.

For many years, financial or securities executives knew that if they had not committed a fraud or had not been fined by the Securities and Exchange Commission (SEC), they could get a discharge in bankruptcy by filing for Chapter 7 or 11. Negligently committing a securities violation would not preclude a bankruptcy discharge for the civil liability flowing therefrom.

The insurance market is undergoing turmoil as a result of recent trends, including terrorism, corporate scandals and skyrocketing healthcare costs. Premiums are soaring, causing firms to cut back on coverage or to cut into their profits ' choices that could have a profoundly adverse impact on the firm's future success.