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The Portfolio Company Playbook – Chapter 2: Navigating Risk from Conflicts of Interest | Proskauer - The Capital Commitment

To embed, copy and paste the code into your website or blog: Private funds frequently negotiate for special rights when making an investment in a portfolio company, such as the right to appoint one or more board directors, voting rights, and liquidation preferences. Fund sponsors often focus solely on the positive aspects of these special rights, such as increased control, without considering fully other implications. As the Peter Parker principle reminds us, with great power comes great responsibility. In the fund context, sponsors should remember the portfolio company corollary: with greater control comes greater exposure to liability. Nowhere is the tension between control and liability risk more evident than where sponsors designate their own members as board directors for portfolio companies. The appointment of sponsor personnel to board seats is commonplace. The reasons are simple; among other things, it allows the sponsor to protect the fund’s investment and many sponsors

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