A common myth is that when two parties are dealing at arm’s length there is no such thing as “too good of a deal.” This view ignores the laws relating to solvency. If a transaction is done while the seller is insolvent or the seller becomes insolvent as a result of the transaction, then there can be “too good a deal” and that deal can be undone – even years after it closes. The law which explains this rule, some of which is captured in Section 548 of the Bankruptcy Code, is the law of fraudulent transfer.
Fraudulent transfer exposure can be devastating because civil liability can be imposed without moral fault on the part of the person being sued for recovery and the look-back period can extend up to six years. No actual fraud or normative wrongdoing is required. Civil liability can result simply from having benefited to the detriment of the other party’s creditors where, at the end of the day, there are insufficient assets to satisfy the claims of such creditors.
Fraudulent Transfer occurs when :
- A transaction (or other corporate event – such as a dividend or other distribution or even an arm’s length sale for inadequate consideration) results in the counter-party receiving a benefit at the expense of unsecured creditors; and
- The company (i) at the time of the transaction is insolvent, or (ii) after the transaction either (a) has unreasonably small capital to continue its business or (b) is unable to repay its obligations as they become due.
A Solvency Opinion is both a valuation opinion and a market test of the company’s forward-looking financial statements. In other words, does the value of the company’s assets – applying the applicable valuation standard – exceed its liabilities and, given market realities and what other similarly situated companies are experiencing, are the company’s cash flow and working capital projections and assumptions reasonable?
Having a party that will receive a commission on the execution of the transaction also provide the solvency opinion is a conflict of interest and does not provide the same level of protection that an independent Solvency Opinion provides. To be effective, a Solvency Opinion needs to be able to pass judicial muster. Solvency advice from an independent financial advisor can assure a board and its’ stakeholders that the decisions made by the board are fair and reasonable.
Click here to review a copy of our Solvency Opinion Guide
Marshall & Stevens has been in the valuation business for more than 85 years and has substantial expertise in rendering Solvency Opinions in a wide variety of matters. Employing a high degree of thoroughness and diligence, our professionals bring a wealth of experience from backgrounds in valuation, law, investment banking, and accounting.