318 8 Exit: Introduction
In a limited-liability company, the main rule is that a shareholder can write
down the value of shares and let the company collapse. (a) According to IFRS,
some financial assets should be measured at fair value (IAS 39). Fair value of an
asset means the amount for which the asset could be exchanged between knowl-
edgeable, willing parties in an arm’s length transaction. (b) According to company
laws, a normal shareholder usually has no legal obligation to make any payments
to the company apart from the amount payble for the shares. Controlling share-
holders can nevertheless be subject to a stricter regime in some jurisdictions. For
example, the actions of a controlling shareholder can be constrained by the doc-
trine of lifting the corporate veil (England), the doctrine of Durchgriff (Germany),
group laws (Konzernrecht under German law), or similar doctrines. In some cases,
a controlling shareholder can be made responsible for loss sustained by other in-
vestors through its own actions.
Investors walking away tends to signal low quality of the investment and to in-
crease funding costs for the firm. One of the ways to mitigate this risk has been to
hide the firm’s bad debts in SIVs as was done in the Enron case. The widespread
use of SIVs was one of the reasons why the 2007 subprime mortgage crisis did not
become known earlier.
8.3 General Remarks on the Management of Risk
8.3.1 Introduction
As investors can exit the firm in many ways, the firm can be exposed to a wide
range of exit-related risks. Some general remarks can nevertheless be made.
Typical risks often relate to: replacement and refinancing; ownership structure
and control; counterparty and agency relationships; as well as information and
reputation.
8.3.2 Replacement Risk and Refinancing Risk
After the exit of an investor, the firm may find it difficult to replace the original
funding arrangement with a similar arrangement (replacement risk). The lack of
funding can, in the worst case, make the firm insolvent, as was seen during the fi-
nancial meltdown which began in 2007 (section 2.5). Even when the firm remains
able to repay its debts when due, the firm may have to pay more for its funding
(refinancing risk). The firm can mitigate replacement and refinancing risks by le-
gal tools and practices.
Choice of the form of payment obligations, choice of funding instruments. At a
general level, cash flow can be influenced by the choice of the form of the firm’s
payment obligations (for a taxonomy of payment obligations, see Volume II). Dif-
ferent payment obligations are combined with different levels of managerial dis-