Recapitalization

What does recapitalization entail?

Recapitalization is a process that alters a company’s capital structure, typically by modifying the ratio between debt and equity. This strategic move has various potential purposes, such as improving financial stability, optimizing tax benefits, or changing the ownership structure. In addition, recapitalization may help to address other corporate objectives.

One example where corporate executives or boards of directors might require counsel on recapitalization under Florida and federal law is when a company seeks to buy back shares from shareholders to decrease outstanding shares and increase earnings per share. Another common example is when a corporation issues additional shares to raise capital for expansion or debt repayment. In both cases, navigating the complex legal landscape and ensuring compliance with applicable laws and regulations is crucial.

Need help with a matter related to recapitalization? Schedule your consultation today with a top corporate governance and operations attorney.

In Florida, which laws and regulations apply to recapitalization?

In Florida, recapitalizations primarily follow the governance of the Florida Business Corporation Act (FBCA) and federal securities laws. The FBCA, specifically Sections 607.0601 to 607.6401, contains provisions related to the issuance, repurchase, and redemption of shares and the approval of significant corporate transactions. These sections are pertinent to recapitalizations involving Florida corporations, as they guide the decision-making process and establish the necessary corporate governance procedures.

On the federal level, the Securities Act of 1933 and the Securities Exchange Act of 1934 are the primary laws regulating securities transactions, including recapitalizations. The Securities and Exchange Commission enforces these laws to protect investors and maintain market integrity by requiring registration, disclosure, and compliance with specific regulations during securities offerings and transactions.

What are common issues regarding recapitalization that lead to litigation?

The following issues are among the most common in litigation involving recapitalization:

• Breach of Fiduciary Duty: Directors and officers may be accused of failing to act in the corporation’s or its shareholders’ best interests, notably when recapitalization benefits a particular group of shareholders or insiders at the expense of others.
• Inadequate Disclosure: Recapitalizations often require the disclosure of material information to shareholders. Incomplete or misleading disclosures can lead to litigation, as shareholders may claim they did not receive adequate disclosure of the risks and consequences of the transaction.
• Violation of Shareholder Rights: Recapitalization transactions may alter the rights of various classes of shareholders. Actions that disproportionately affect one type of shareholder or dilute their ownership stake can lead to claims of unfair treatment or violation of shareholder rights.
• Securities Law Violations: Recapitalization transactions must comply with federal and state securities laws, including registration and disclosure requirements. Non-compliance with these regulations can result in litigation and potential penalties.
• Minority Shareholder Oppression: Recapitalization transactions that unfairly disadvantage minority shareholders, such as those that disproportionately benefit majority shareholders or management, can lead to claims of minority shareholder oppression.

What are effective measures to minimize the risk of litigation over recapitalization?

Implementing the following strategies may help mitigate risk:

• Thorough Due Diligence: Conduct comprehensive due diligence to understand the potential risks and benefits of the recapitalization transaction and ensure that all material information accurately discloses to shareholders.
• Fairness Opinions: Obtain fairness opinions from independent financial advisors to support the board’s decision that the recapitalization is fair and in the corporation’s and its shareholders’ best interests.
• Robust Corporate Governance: Adhere to established corporate governance practices, including forming a special committee of independent directors to evaluate the recapitalization proposal and seeking shareholder approval when required.
• Transparent Communication: Communicate openly and honestly with shareholders, explaining the rationale behind the recapitalization and its anticipated impact on shareholder value.
• Compliance with Securities Laws: Ensure that the recapitalization transaction complies with all applicable federal and state securities laws, including registration, disclosure, and reporting requirements.

When a set of facts is appropriate to meet litigation requirements, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation, please contact our office to set up your initial consultation.

Frequently Asked Questions

1. What is the purpose of a recapitalization?

Companies often utilize recapitalizations to change their capital structure, which may involve altering the mix of debt and equity, issuing new securities, or repurchasing existing securities. This change can help a company optimize its capital structure, improve its financial flexibility, or achieve other strategic objectives, such as facilitating a merger or acquisition.

2. How does a recapitalization impact existing shareholders?

Recapitalizations can have significant implications for existing shareholders, as they may change the ownership structure, dilute or concentrate share ownership, and affect the value of the shares. Accordingly, shareholders should carefully evaluate the potential impact of a recapitalization on their ownership stake and the value of their investment.

3. Are there tax implications for recapitalizations?

Yes, recapitalizations can have tax implications for the company and its shareholders. Tax liabilities may arise at the corporate or shareholder level, depending on the transaction’s structure. Therefore, companies should consult with tax advisors to understand the potential tax consequences of a recapitalization and to structure the transaction in the most tax-efficient manner possible.

Have more questions about governance or operations for your business?

Crucially, this overview of recapitalization does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain a tireless advocate every step of the way. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation.