The Fiduciary Duties of Directors of Troubled Companies: Emerging Clarity

This post is from Marshall S. Huebner of Davis Polk & Wardwell LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

For many years, there was a diversity of opinion — including judicial opinion — with respect to various issues connected to the duties of directors and officers in the troubled company situation. Can they be sued directly by creditors? Does the business judgment rule apply to protect them? Is there a tort called “deepening insolvency?” To whom are duties owed? Can directors and officers continue to take (prudent) risks to maximize the value of the enterprise?

I have recently published an article entitled “The Fiduciary Duties of Directors of Troubled U.S. Companies: Emerging Clarity,” which addresses two recent Delaware Supreme Court decisions that have shed needed light on these and related topics, and should provide much comfort to officers and directors. It opines that many ensconced buzzwords and doctrines — like “zone of insolvency” and “deepening insolvency” now have little to no meaning, and that the developing theme of these important decisions is the continuity (not any changes) in fiduciary duties, notwithstanding financial distress. It also provides some practical guidance for directors, suggesting that traditional questions like “are we in the zone yet” and “to whom are our duties owed” may be of much less value than a simplified “are we attempting to maximize the value of the enterprise.”

The article is available here.

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