At some point, you may be faced with a high-stakes lawsuit which could place your company’s future in doubt.
It’s difficult to treat that case like any other when it has the potential to destroy your business, but there is a path you should follow.
“Each case must be examined objectively on its merits to determine what effect an adverse outcome may have on your business,” says Thomas W. Hill, a director at Kegler, Brown, Hill & Ritter.
Smart Business spoke with Hill about how to handle bet-the-company cases.
How do you know if you’re facing a bet-the-company case?
The answer to that question depends upon the answer to a number of other questions.
First, what are the allegations and legal claims? How strong are they? What are the available defenses? Second, what are the damages sought or the relief sought? Third, what happens if you lose? Can the company pay a ‘worst case’ damages award? Will an adverse result impair or potentially cripple the company’s ability to do business?
Failure to carefully analyze a lawsuit at the outset can result in disaster. It is very difficult for a company to answer those questions on its own without involving its legal counsel.
What should companies look for?
First, examine the merits of the claims and available defenses and make a realistic estimate of the potential damages that might be awarded should the company lose. If the case appears challenging and a realistic damages award could exceed the company’s ability to pay, it’s likely a bet-the-company case.
Second, some cases attack the core of the way a company conducts its business. In such a case, the amount of an adverse decision may not materially impact the company’s balance sheet, but an adverse result could devastate or substantially impair the company’s ability to continue its operations. That too would be a bet-the-company case.
Third, examine whether an adverse result may provoke ‘copy-cat’ lawsuits. A single case not seeking massive damages could, if lost, be the springboard for follow-on lawsuits by others with similar claims, the cumulative amount of which could destroy the company.
Also, examine the company’s loan covenants and think about what impact an adverse judgment could have on the company’s financing capabilities. If an adverse judgment would result in a violation of a company’s loan covenants or destroy the company’s financing capabilities, it is likely a bet-the-company case.
All these issues need to be examined early on and decisions must be preliminarily made. But those decisions are not necessarily final. Cases that may appear innocuous can turn ugly, and cases that appear challenging can take a dramatic turn for the better if properly handled. As my college basketball coach used to say, ‘you have to keep your knees bent,’ meaning stay flexible and be prepared to react quickly to changing circumstances.