CHAPTER 1 The Retention of a CRO

• Jurisdiction: United States

CHAPTER 1: The Retention of a CRO

CONTRIBUTING AUTHORS

Kenneth A. Rosen (Lowenstein Sandler LLP)

Richard J. Corbi (Lowenstein Sandler LLP)

Elie J. Worenklein (Lowenstein Sandler LLP)

Steven F. Agran (Morris Anderson)

Daniel F. Dooley (Morris Anderson)

Mark J. Welch (Morris Anderson)

A. SCOPE OF AUTHORITY

The decision to hire a Chief Restructuring Officer (CRO) is often difficult and is generally made after extensive discussions among the company, its secured lenders, significant creditors and board of directors. After the decision to retain a CRO is made, the next critical step is to define the role of the CRO.

The scope of authority for the CRO can be as broad or as narrow as the client company chooses. The overriding decision is defining that scope prior to the decision to hire the CRO so that all executives and constituents are aware of the authority of the CRO. As the engagement unfolds, it is important to constantly reevaluate the roles and determine whether the correct balance of power is being yielded by each executive, particularly the CRO. As the newest member of the executive team and a person who is unfamiliar to many people in the organization, it is imperative to define the scope of the CRO's authority and to communicate with the constituents to avoid confusion. The scope of authority can include financial, executive or operational responsibilities, or some combination of these three. The CRO's scope of authority almost always includes, at a minimum, financial responsibilities.

The CRO moniker in itself offers very broad latitude in defining responsibilities. Being the Chief "Restructuring" Officer allows an executive to be responsible for any or all facets of the organization as it restructures itself. It is important for the CRO to be responsive and decisive in the role, whether the CRO focuses on the financial, executive or operational areas of the company.

The CRO should report to the company's board of directors so that the CEO and the CRO are essentially on the same level of authority. In fact, many businesses that are in financial restructuring mode attempt to segregate the financial restructuring tasks of the company, which are typically led by the CRO, from the more normal ongoing business tasks of the company, which are typically led by the CEO. In essence, this approach treats the financial restructuring as a special project with its own dedicated resources in order to isolate some of the impact of the financial restructuring from the day-to-day business operations. However, it is important to note that the ongoing business tasks and the financial restructuring tasks are interdependent and that the CRO and the CEO must work collaboratively on all issues to reach a successful outcome. Furthermore, some courts have even held that the CEO and board of directors are required to maintain oversight of the restructuring process and cannot abdicate their responsibilities. Therefore, it is advisable to specifically delineate in the engagement letter and retention application the CRO's reporting requirements.

1. FINANCIAL RESTRUCTURING

In almost all restructuring situations, the financial performance of the company is under stress. Very often, cash availability is minimal to nonexistent. At the same time, lenders are pressuring the organization to reduce their exposure and to ensure that their collateral is being used strictly to improve their financial position. Lastly, the customers and vendors of the business have been pushed to the brink with often little communication from the company, furthering their confusion over the situation. Handled correctly, the CRO will guide the company through the correct methods to handle each constituent that is affected by the company's financial difficulties.

The CRO needs to first and foremost understand the near-term financial situation of the company. The single most important role for the CRO is to oversee cash management. The CRO needs to have full control over the employees managing the company's cash and be the person that is ultimately deciding how to monetize assets and distribute funds to ensure the conservation of cash. As is always the case, cash is king, and the CRO must control it.

The CRO must be given overall control over the projections and the decisions being made regarding cash, which is imperative to minimize the likelihood of the company running out of cash and forcing operations to cease. The first order of business is to forecast the short-term financial needs of the company. Working with the company's management team and the finance department, developing a 13-week cash-flow projection is essential. Understanding the short-term cash position of the company will allow decisions to be made that will help the company survive. At the same time, it will provide the information necessary for the CRO to negotiate and work with lenders.

Working with the 13-week cash-flow model, the CRO will have the ability to manage the cash requirements looking forward and not simply operating within the daily cash availability. During the first few weeks of an engagement, when cash is most vulnerable, the CRO must have the authority, and be required, to approve all cash disbursements. As an independent arbiter of cash disbursements, all payments are viewed strictly based on merits for the business's short-term operation, without emotion or personal bias.

The CRO must have extensive experience negotiating with lenders and vendors. As an independent voice within the organization, the CRO is not tainted with any issues that may have arisen prior to his/her hiring. As is often the case, projections have been missed, frustrating lenders. Communication is also often frustratingly absent. The CRO should have credibility with the lender community and, by utilizing the cash flow models, be able to discuss near-term (13-week) forecasted results.

As the short-term issues are managed, longer-term negotiations of debt are another responsibility of the CRO. Very often, management/ownership has been in a long-term relationship with a lender and cannot understand the changes that happen when financial distress occurs. The owners are generally not able to remove the emotional side from the negotiations, so having an independent point-person often allows the negotiations to be more productive at reaching a working solution.

As with lenders, the CRO is an independent voice within the vendor community. The CRO also understands the importance of maintaining open and direct communications with vendors to ensure no disruption in the supply cycle. Vendors more often than not would prefer to work with the company to help them through the financial difficulties. While a vendor will not look to extend additional credit, the CRO often has the ability to negotiate agreements that will continue to provide the goods needed on a near-term basis.

2. OPERATIONS AND PERSONNEL

The CRO is an independent arbiter of situations, often using the company's financial data to make decisions, thereby removing any biases from the decision-making process. In businesses that have passed from generation to generation, the emotional attachment that existing management may have to its customers, suppliers, business units and employees is almost impossible to get around. The CRO does not have that history, which tends to cloud the decision-making process. While the CRO does become emotionally involved with decisions, the company's legacy is often not as large a part of the decision.

It is often very difficult for a company to analyze the multiple business units under its corporate umbrella. Companies either do not analyze the business units separately, or they will rationalize the importance and integral nature of a business unit that has been part of the business for generations when it is in fact a financial drain on the company's overall operations. The CRO should have the ability to analyze and recommend the divestiture of any business unit to the ownership group. The CRO very often has the experience to oversee the divestiture, and once again is independent in its assessment of value.

The CRO may also take on the lead in negotiations with customers. After analyzing the customer base and discussing the pros and cons of various customers, the CRO can once again be the independent arbiter and negotiator with customers. The CRO also has the credibility to re-establish relationships that have become strained from the poor customer service that often happens during times of financial distress. The CRO adds credibility and can be a sympathetic ear for customer complaints and discussions. The CRO also has the ability to negotiate without the history and experiences of current management.

Personnel decisions are often the most difficult decisions for a financially troubled company to make. Reducing the workforce during a downturn is often very difficult, as management often feels a moral obligation to its employees. The CRO understands the difficulties resulting from the reduction in force, but also understands the consequences of not making the necessary changes. While no one ever wants to reduce the number of employees, sometimes it is inevitable. The CRO is independent and can assist in making the necessary reductions. Also, the CRO understands that any reduction of the workforce needs to be done once (if possible) and not in multiple layoffs spread over an elongated timeframe. Employees understand that when business is slow, employees do lose their jobs. What companies need to avoid is creating the fear that employees feel when they do not know whether employee reductions will be a monthly occurrence.

3. SUMMARY

The scope of authority of the CRO can be broad or narrow. All facets of a business can be impacted by the hiring of a CRO and providing him/her with the authority to impact a functional area. But the most important part of hiring the CRO is to define the role. The CRO needs to work with the current...