Case Study: A 60 Day Program to Rationalize Outstanding Litigation.
Background
Assets of OldCo (national armored transportation and services company with revenues of ~$185 million) transferred to NewCo in foreclosure sale. CRO retains David Maginsky, principal of Well Advised, as General Counsel. OldCo was (and NewCo becomes) heavily regulated in 46 states, is delinquent on many key licensing and compliance regulations, including gaming, weapons and DOT. Litigation is pending nationally in many different jurisdictions, involving employment, contract and commercial claims and landlord disputes. One such pending claim is a California wage-and-hour class action, which had been in litigation for several years and which could subject NewCo to over $5 million in potential damages.
Process
Following retention as General Counsel, Well Advised’s David Maginsky takes immediate steps to identify both the magnitude and severity of existing litigation. Foreclosures, bankruptcies and distressed situations, like carve outs, often present unique challenges as there is no internal management of legal processes, including litigation.
Well Advised implemented its proprietary litigation handicapping scorecard, listing each pending and threatened claim and, after identifying measurable factors unique to each claim, arrive at a weighted score. Using our method, claims assigned a lower score continue to be defended; but claims with higher scores are marked as candidates for early settlement or other disposition. Factors affecting the weight of each claim include its size, duration of pendency, jurisdiction, the strength of NewCo’s defenses, and the possibility of insurance coverage.
Result
At the time of the foreclosure sale, OldCo’s annual litigation spend exceeded $350,000, with over 50 separate claims pending against the company nationally. In about six months’ post-acquisition, over 30 of the claims are settled or dismissed, and NewCo’s annual legal expenses fell to $150,000, representing a reduction of over $200,000. Notably NewCo, operating at a then 5% EBITDA, would have had to sell $4,000,000 worth of equipment and services in order to realize the same return as our litigation strategy.
NewCo’s CRO, retained by the acquiring fund, has this to say about our litigation management process:
“From the outset David leveraged his extensive litigation background and years of legal and management experience to quickly arrive at a rational, workable way of valuing, defending, and disposing of the litigations facing NewCo. David and his team provided expertise right out of the gate, with no burn-in. We could not have been more pleased with the results, given our need to quickly and cost effectively channel precious operating cash elsewhere within NewCo.”