Key Steps in Winding Down Private Equity Portfolio Company

Lots of private equity funding—not to mention venture capital—has flowed to companies over the last couple of years. And, as we all know, that funding firehose is getting turned way down.

That means that there will almost certainly be a host of legally active but operationally inactive portfolio companies needing to be dealt with in the years to come.

Such companies continue to incur costs and pose legal risks as they remain in a state of limbo, including:

• Paying taxes/filing returns
• Performing corporate formalities
• Creditors coming out of the woodwork to assert claims
• Unexpected claims arising against unsuspecting officers and directors

These and other issues can pop up as long as a portfolio company exists—regardless of whether it’s operational. In my experience, there’s often a “Murphy’s Law” moment that arises when companies are left to wither instead of properly being wound down.

Don’t procrastinate. Be proactive so you can move forward with confidence that you’ve closed the loop on any lingering liability.

Steps Involved in Winding Down a Portfolio Company of a Private Equity Fund

The specific steps involved in the wind-down process vary by state, but in most cases the following tasks are involved:

• Comply with Corporate Requirements. A corporation’s governing documents typically set forth the procedures that must be followed to wind down/dissolve the corporation, such as a shareholder vote.
• Comply with Government Requirements. A certificate of dissolution must be filed with a state’s secretary of state office (or equivalent office). A final tax return must be filed, and the IRS provides a checklist of a number of other steps that must be taken in order to wind down/dissolve a corporation.
• Collect Debts and Settle Claims. Collecting outstanding debts and resolving outstanding claims is an important part of the wind down process.
• Liquidate and Distribute Assets. If any assets remain after paying corporate debts, they will be liquidated and distributed to shareholders.
• Administrative Tasks. Minor administrative tasks, such as closing bank accounts, must also be attended to.

No one relishes the idea of winding down their business, and that includes winding down portfolio companies of private equity funds. Unfortunately, it’s sometimes necessary.

And it doesn’t simply entail hanging a “Closed” sign on the door and walking away. In order to avoid personal liability and adhere to various laws and regulations, a dissolution and wind-down process under state law must be undertaken.

Such a process requires the involvement of legal counsel in order to ensure that it’s done right, and owners and officers, and fund managers can walk away confident that they will not face future claims.

To learn more about the wind down process, or for assistance, please contact David Dragich at ddragich@dragichlaw.com.