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Negotiating Under Stress and Financial Distress

A Practical Guide

Nowadays legal counsel face tough challenges in the negotiation of business transactions. Frequently, companies need to manage the complex pressures of maintaining operations under volatile financial markets, unfair competition, limited or non-existent financial opportunities, incompetent upper-management, and poorly informed decision-making practices.[1] Financial distress is a business condition experienced by certain corporate entities which makes it difficult for such entities to honor their obligations before creditors and suppliers.[2]

 The role of legal counsel is to skillfully undertake these challenges and help corporations to organize or restructure their financial and legal issues in the best possible manner, without affecting their market position before customers, creditors and suppliers. As adept negotiators, attorneys must be prepared to handle different types of business transactions, such as mergers and acquisitions, securitizations, buyback options, joint ventures, shareholders’ agreements, appraisal remedies, corporate governance, duties of officers and directors, etc.

Time is money in corporate transactions; therefore legal counsel experience enormous pressures and fatigue to comply with their clients’ needs and expectations. Clients anticipate quick response times from lawyers and to comply with such strict deadlines, lawyers may be exposed to levels of stress[3] in business transactions that may become difficult to manage.

Negotiating transactions involving companies dealing with economic troubles and limited financial options is increasingly difficult when legal counsel are unable to manage stress and respond to unforeseen events that drastically alter the route of negotiations. Knowledge of the specific business matters and study of the best possible alternatives can make a difference in reaching an agreement when advising companies in financial distress.[4]

Beyond the complications of understanding the stressful environment of business transactions, there is also an ironic tendency between lawyers of opposite parties to make corporate transactions more difficult than they actually are. There is a culture of “annoying your adversary” and making deals more painful, instead of cooperating in order to achieve a win-win agreement that benefits all parties in the transaction.

The purpose of this article is to set forth certain strategies that may help lawyers when negotiating business transactions under stress and financial distress. Our conclusion is that in order to reduce the probability of settling on a premature deal when negotiating under stress and financial distress, the negotiator needs to: (i) understand the specific problems of the company; (ii) communicate and cooperate to handle the situation; (iii) propose a mutual gain plan for both parties, and (iv) understand the adversity of litigation.

The first section of this work provides a general overview of negotiations under stress and distress, and the factors behind these conditions. The second section establishes that the first step to undertake the challenge is to identify and acknowledge the problem. The third section explains that communication and cooperation between parties is the second step to work on. The fourth section explains how having different options to reach a mutual gain outcome would make the task easier. The fifth section proposes that with a better understanding of the costs of non-settlement and litigation, the parties may be motivated to reach an agreement, followed by our concluding thoughts.

Negotiation under stress and distress

Negotiation is the art of convincing others to reach an agreement in order to resolve specific issues and to achieve specific outcomes.[5] Negotiation has always been present in relationships between humans, as an instinct or a part of human nature that allows individuals to achieve determined interests.

In the same manner that using a new language can be improved upon, the art of negotiating can be polished up with practice and by using some techniques to persuade your opponents. One’s ability as a negotiator can depend of many factors, such as personal background, personality type, and personal presentation. These different factors define the style in which negotiators approach negotiations and reach agreements.[6]

Successful negotiation often involves brainstorming, creativity and cooperation, and requires one to be open, patient and tolerant in listening to the ideas and different perspectives of the counterpart. Body language, confidence level, knowledge of the opponent, and a comprehensive understanding of the specific matter are all factors that can influence negotiations.

Roger Fisher and William Ury in the book “Getting to Yes, Negotiating Agreements Without Giving In,” propose a method called “negotiation on the merits.”[7] This method is summarized in the following four steps: (i) to separate emotions and beliefs from the specific matter to be negotiated, (ii) to center the discussion on interests and not personal positions, (iii) planning different alternatives to reach a mutual gain outcome, and (iv) to seek objective standards in the final agreement. However, the challenge is in applying these negotiation strategies when handling complex situations.[8]

The ability to negotiate and make use of the techniques mentioned above almost disappear when negotiating under stress. According to some psychiatric studies, in extreme states of stress people can experience “emotional flooding”, which can lead to “cognitive distortions.”[9] This makes it difficult for negotiators to separate emotions and positions from the main interests of the discussion. Thus, the probability of reaching an unfair and risky agreement is very high.

There are several factors causing stress during negotiations. Lack of preparation and inadequate understanding of the specific matter appear to be the principal factors causing stress.[10] When a negotiator does not understand the client’s interests and fails to prepare a critical strategy with alternatives to resolving the dispute, they open the door to ineffective and unproductive negotiations. This can transform initial dealings that might have been easy to handle into highly stressful situations.

A lack of information and the development of unforeseen events are also factors that may make a negotiation stressful.[11] Failure to disclose important information during negotiations puts the negotiator in a position of uncertainty and makes it difficult to provide possible scenarios to reach a mutual gain agreement. Unforeseen events are not within the control of negotiators and they often change the course of the discussion. Being prepared with different alternatives to resolve the dispute helps negotiators handle unexpected situations easily.

In some limited cases, parties will exchange erroneous information with the intention of misleading their adversary. The problem in this situation is that the opponent may arrive at some assumptions based on such misleading information. This would, of course, result in liability towards the party acting in bad faith.

Strict deadlines, working under pressure and fatigue are other factors underlying stressful negotiations.[12] A deadline to reach an agreement may motivate the discussion, or make it very difficult. In both cases parties experience elevated stress because of the client’s time expectations. In such cases, negotiators often fix a schedule to follow during the discussion in order to come to a timely agreement.

Working under pressure is common in transactions where the companies are subject to limited financial options and need an urgent restructuring to obtain financial support in a short period of time. Organizations dealing with financial distress want to avoid insolvency, bankruptcy, and creditor or supplier pressures and ultimatums. They need a quick solution to resolve their financial troubles.

There are different options to help distressed companies to rationalize its balance sheet before going bankrupt or entering another insolvency situation. Depending on the circumstances of each company, they can receive a capital injection, merge with another company, sell their assets, create a joint venture, apply for a credit, provide a stock exchange offer, change their shareholders’ agreements, etc.[13] However, all these viable options need to be completed in a short period of time due to the pressure of creditors, suppliers and authorities. The work of legal counsel is to implement the company restructure on time, maximizing the interest of the client, and acting ethically to avoid professional liabilities.

The ability to handle complex restructuring requires creativity, focusing on the details and the ability to improvise and adapt to new unforeseen events. Stress may inhibit the negotiator’s competency to carry out this complex task, and instead, appeal to their emotions and personal positions. This can often impede discussions and lead to low expectations in achieving a satisfactory result. [14]

When emotions begin to overtake rational explanations, it is recommended to take breaks to help clear the mind and start again with a new perspective of the problem. Making use of sympathy and sense of humor might also help to encourage opponents to adopt a cooperative position. [15]

Strategies that legal counsel may use in negotiating corporate restructuring and dealing with stressful transactions are explained in the following sections.

Identify and acknowledge the problem

The first crucial step in negotiating for a company experiencing financial distress is to identify and acknowledge the problematic issues. Negotiators need to be clear and honest with their counterparts about the financial position of the company without concealing information or magnifying problematic issues.[16] To the surprise of many corporations, creditors often respond favorably when they know the true nature of the financial distress.[17] A common mistake is to hide information from creditors, which they will eventually discover when realizing that the company cannot pay its bills.

Addressing the root cause of the economic difficulties a company is experiencing, with the knowledge of all the parties involved, will facilitate negotiation and allow the distressed company to achieve a better deal from creditors. Disclosing relevant information underlying the company’s financial troubles can also help elucidate different alternatives to restructuring and encourage active participation from creditors and suppliers, since they do not want drastic deviations to their income and cash flow that may generate a breach of contract from their customers.

In the process of disclosing information, it is common for negotiators to try to maximize the economic interest of their clients by omitting certain information or making wrongful statements with respect to the financial position of the company. Omissions and misleading information might create wrongful assumptions of creditors causing professional responsibility due to violations of the duty of care, duty of loyalty and duty of acting in good faith. Wrongful statements or omissions must be corrected immediately to avoid professional liability.[18] A skillful negotiator can rectify these statements or behaviors, clarify the misunderstanding and reach an agreement that benefits both parties.

On the other hand, failure to disclosure the relevant information of the transaction may hurt the credibility of the distressed company, and make it impossible to reach a fair agreement with the cooperation of the creditors. Trust and good faith of all parties are likely the most important values of a successful negotiation. When parties are not able to trust each other and act in good faith, the possibility of reaching a viable settlement is almost nonexistent.

Communicate and cooperate to handle the situation

Direct and honest communication to creditors makes the difference when negotiating under stress and distress.[19] Creditors’ perceptions of transparency and commitment to resolve the financial troubles of the company creates a friendly environment and reduces the pressure of creditors and suppliers against the company. Creditors know that if they want to recover their investment quickly, they need to cooperate and find an agreement where both parties can benefit.

Transparency and commitment to making the necessary changes to rehabilitate the company, instead of misleading creditors and creating confusion, is one of the most important factors in settling disputes, taking into account the lack of authority of the distressed company to control the terms of the bargaining.

Friendly communication and the perception of total transparency are the best strategies for companies dealing with financial distress when negotiating with creditors. One way of achieving this is by opening the books and financial statements of the company to creditors, revealing their financial position.[20] However, the advice of legal counsel is also important when deciding what information may be available for creditors without impacting the company’s position to receive a beneficial settlement.

Understanding the creditor’s interests and expectations may help the parties to find an outcome that can be accepted by the creditors without putting the distressed company at further risk. This may include negotiators accepting responsibility for and consequences of incompetent management which brought the company to that vulnerable position, and choosing the best of the worst outcomes in the negotiation.[21]

There can be a real temptation to play dirty during negotiations considering the financial impact and future of the company, however legal counsel should confront the reality of the situation and see the challenge as an opportunity to rehabilitate the company. Unfortunately, we saw many real-life examples during the last economic recession of legal counsel defrauding creditors and running away. However the lesson learned is that wrongful conduct is always discovered and punished as a matter of course.[22]

Another positive sign of cooperation and commitment to handling the legal situation of the distressed company is by rectifying any unlawful conduct that may have been regular in the day-to-day operations of the entity (e.g. uncontrolled inventories, inaccurate accounting records, excessive bonuses to directors, payment of inexplicable commissions, etc.).[23] All these positive actions can be brought to the attention of the counterparts during negotiation to generate a confident perception towards the reorganization of the company.

When dealing with aggressive creditors it is always helpful to appoint an independent intermediary responsible for communicating between both parties, with the purpose of keeping negotiations alive.[24] In most cases this intermediary is a mediator with professional expertise in implementing strategies during difficult negotiations. The role of the mediator is to listen to the arguments of each party and attempt to find common ground where both parties may agree without having their individual interests affected.

Mutual Gain Plan

Formulating a critical route to follow during difficult negotiations by preparing different mutual gain plans to resolve the dispute is the next step in achieving a beneficial deal when negotiating under stress and distress. According to Roger Fisher and William Ury, a negotiator should know the “best alternative to a negotiated agreement” (BATNA)[25] that should be the point of reference against any offer proposed during the bargaining.

The dialogue during business transactions can be difficult because of people’s different backgrounds, cultures, interests and perspectives. One of the best ways to approach business negotiations is to identify the issues in which all parties mutually agree. [26] This brings positive interaction to the discussion and allows negotiators to feel more comfortable and secure about the expectation of reaching a settlement.

Business transactions where a distressed company has limited options and flexibility to reach an agreement requires negotiators to identify the most probable scenarios to get a viable deal for the company. In order to prepare those different alternatives a negotiator may need to understand the interests and BATNA of all parties. Knowing the BATNA of each party allows the negotiator to fix a point of reference to compare and measure the risks of each offer proposed.[27] When negotiators fail to identify the BATNA for all parties, it is highly likely that they will settle for a precarious deal.

Brainstorming, creativity and improvisation are very important abilities in negotiating corporate transactions; however these abilities are difficult to develop and implement under stress. For this reason preparation and knowledge of different possible alternatives is critical in this type of negotiations.[28]

Proposals with high likelihood of being accepted are those that integrate the interests of all the parties. For this reason mutual gain plans are crucial in negotiating distressed transactions because they provide a win-win solution for creditors, and at the same time, an opportunity to solve the financial troubles of the distressed company. Adopting an aggressive position is not a smart strategy for companies dealing with financial distress because of their weak position in the negotiation.

To build a viable mutual gain plan it is necessary to obtain the maximum possible amount of information about your adversary. Knowledge of the weaknesses and strengths of creditors could help distressed companies appeal to emotions and persuade creditors to accept deals that rationally might not make sense, but are emotionally appealing (for example if the agreement saves a certain number of jobs, benefits society or boosts the economy of a struggling town).[29]

It is difficult to foresee the course a negotiation will take, so it is better if negotiators know their boundaries and limits.  Most of the time it will be necessary for negotiators to improvise and adopt quick decisions that, without knowledge, could potentially lead the company into a risky position. Lack of knowledge of the opponent and the BATNA can complicate negotiations, creating confusion and may lead to multiple misunderstandings.

Coming to the negotiation with a detailed offer could give negotiators an advantage over aggressive creditors. Proposal plans should include the specific actions required from the counterpart, explaining the reasons that legitimize such course of action and why they will be easily accepted by the adversary.[30] Legal counsel advisors need to have a sense of liability for malpractice, so it is important to measure the risk of lost in every case.

Negotiation of contracts, letters of intent, amendments, joint ventures, memorandums of understanding, and terms sheets are very common in corporate business transactions. These agreements are the legal mechanisms to ensure protection of companies in distress. The work of legal counsel is to set up a legal framework to protect companies against future disputes and aggressive response of creditors. This is also an opportunity to establish alternative methods to resolving disputes when litigation before courts does not provide an efficient remedy.[31]

Adversity of litigation

Unfair agreements often end in litigation that requires more time and resources for all parties.[32] This is a motivation for parties to cooperate to obtain mutual gain outcomes where everyone is satisfied with the result.

However negotiators need to know when they should walk away from a negotiation. If the proposal terms would put a client in a position where they would not be able to respect the deal, it could make sense to choose litigation to resolve the dispute. Negotiators should not be afraid to choose litigation when gauging an unfair agreement vis a vis litigation, they may realize that litigation is the best option. Analyzing the chances to succeed in litigation is also important when making this decision.

Before going to litigation the parties may consider mediation as a method to deal with the dispute. Mediation is a very helpful process used to resolve a dispute between two or more parties. The advantages of mediation are that the parties can avoid the exhausting litigation process which characterizes judicial disputes. Parties can save time, money and receive expert advice when resolving disputes through a mediation process.[33]

The mediator is an expert that identifies and focuses on issues beyond the legal scope of the problem. A mediator understands that there could be other aspects having more weight than the legal issues, such as the relationships between the parties, economic concerns, personal conflicts or political implications; aspects that are not always reviewed in judicial procedures.

In mediation the parties are their own judge in the controversy and often parties feel more understood with respect to their individual needs. Because of this reason the level of satisfaction in a mediation process is higher than resolving disputes by litigation.[34]

However not all disputes can be resolved by mediation. There are specific matters, such as criminal cases that have to be resolved in a trial due to the harm caused to the social order and public interest.

The role of the mediator is to listen to the arguments of each party to find the medium point in which everyone may agree without compromising their interests. Before approaching the mediation process, parties should be open to cooperating and give certain concessions in resolving the issue; otherwise the process becomes inefficient and a waste of time, money and efforts.


Negotiating business transactions is a complex task for legal counsel; however it can become even more difficult in negotiations under stress due to financial difficulties of a company. In those situations the ability to use creativity and improvise new plans of

actions during discussions is more challenging due to the pressures on the negotiators. As suggested in this note, the best way to manage negotiations under stress and distress is through the preparation of the best alternatives to resolving the dispute, and having a mutual gain plan.

Acknowledging the problem and being able to communicate and cooperate with your adversaries can make these complex transactions easier to resolve than expected. Transparency, honesty and ethical interactions provide positive signs to creditors facilitating their cooperation in the reorganization and restructuring of the company.

Distressed companies should view this process as an opportunity to recover the trust of its creditors and suppliers, and as a new beginning with clean balance sheets and the ability to undertake the continuing challenges of the financial market.

Although the concept of fairness is relative and depends on the circumstances of each case, negotiators should always look for a fair agreement to avoid ending in laborious litigation. However they should not be afraid of litigation if it is the best possible option to resolve the dispute.

[1] Philip Mindlin, et al, Managing Stress and More: A corporate Lawyer’s Guide to Business Decisions in the Current Environment , Wachtell, Lipton, Rosen & Katz (ed. 2009) , at 1-2.

[2] Lemma W. Senbet, et al, Financial Distress, Bankruptcy and Reorganization (9th ed. 1995), at 2-7

[3] According to the Oxford Reference Dictionary, stress is a mental, emotional or physical stage that people suffer due to specific circumstances.

[4] Roger Fisher and William Ury, Getting to Yes, Negotiating Agreement without Giving in (3rd ed. 2011), at 99-103.

[5] Id. at XVII-XXIX.

[6] Charles B. Craver, Effective Legal Negotiation and Settlement (7th ed. 2012), at 265-279.

[7] Op. cit. Getting to Yes, Negotiating Agreement without Giving in (3rd ed. 2011)

[8] Op. cit. Getting to Yes, Negotiating Agreement without Giving in (3rd ed. 2011), at 3-15.

[9] Watershed Associates, Inc, Dominate Stress During a Negotiation, Best Negotiating Practices: 1-2, Web Apr. 2014.

[10] Jeff Weiss and Jonathan Hughes, Implementing Strategies in Extreme Negotiations, Harvard Business Review, Nov. 2010: 1-7. Web. Apr. 2014.

[11] Philip Mindlin, et al, Managing Stress and More: A corporate Lawyer’s Guide to Business Decisions in the Current Environment , Wachtell, Lipton, Rosen & Katz (ed. 2009) , at 3-13.

[12] Valerie J. Sutherland and Cary L. Cooper, Strategic Stress Management. An Organization Approach. (2nd ed. 2010), at 44-62.

[13] Lemma W. Senbet, et al, Financial Distress, Bankruptcy and Reorganization (9th ed. 1995), at 921-928.

[14] Kimberlyn Leary, et at,. Negotiating with Emotion, Harvard Business Review. Jan 2013: 1-4. Web. Apr. 2014, at 1.

[15] Op.cit., Effective Legal Negotiation and Settlement (7th ed. 2012), at 128.

[16] Ben Branch, Fiduciary Duty: Shareholders v. Creditors, Financial practice and education (2012), at 8-13.

[17] Jeff Weiss and Jonathan Hughes, Implementing Strategies in Extreme Negotiations, Harvard Business Review, Nov. 2010: 1-7. Web. Apr. 2014.

[18] Susan R. Martyn, et al The Law Governing Lawyers, National Rules, Statutes and State Lawyers Codes (ed. 2013-2014), at 321.

[19] John R. Trentacosta, Restructuring Contracts in Stressful Times: Strategies for Successful Contract Negotiation, Nonprofit World, May 2010: 22, Web. Apr. 2014.

[20] id.

[21] Op. cit, Strategic Stress Management. An Organization Approach. (2nd ed. 2010), at 44-62.

[22] Stephen M. Bainbridge, Corporate Governance after the Financial Crisis (1st ed. 2012), at 1-19.

[23] David T. Brown, Assets Sales by Financially Distressed Firms, Journal of Corporate Finance (1994), at 233-257.

[24] Op. cit., Effective Legal Negotiation and Settlement (7th ed. 2012), at 340-364.

[25] Op. cit., Getting to Yes, Negotiating Agreement without Giving in (3rd ed. 2011) at 3-15.

[26] Id.

[27] Id.

[28] Op.cit., Effective Legal Negotiation and Settlement (7th ed. 2012), at 53-74.

[29] Id.

[30] Op. cit., Restructuring Contracts in Stressful Times: Strategies for Successful Contract Negotiation, Nonprofit World, May 2010: 22, Web. Apr. 2014.

[31] David T. Brown, Assets Sales by Financially Distressed Firms, Journal of Corporate Finance, (1994), at 233-257.

[32] Maria Carapeto, Bankruptcy Bargaining with Outside Options and Strategy Delay, Journal of Corporate Finance, (2005), at 736-746.

[33] Op. cit, Effective Legal Negotiation and Settlement (7th ed. 2012), at 335-364.

[34] Op.cit., Bankruptcy Bargaining with Outside Options and Strategy Delay, Journal of Corporate Finance, (2005), at 736-746. 


Héctor G. González