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E-MailThis 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.
One Comment
Some of the observations and ideas here were articulated earlier this year in a paper by Baird and Henderson called “Other People’s Money.”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017615
Since Miller-Modigliani, we’ve had good reason to doubt whether there are any lasting differences between the interests of creditors and the interests of shareholders.
Nonetheless, on my view managers and directors should do more. Every decision about value maximization has both a dollar value and a time frame associated with it. Asian manufacturing firms have left their American counterparts in the dust by adopting accounting and management methods that attend both to the marginal costs and benefits AND the turnover rates or liquidity constraints. No picture of a firm is complete without that understanding of dynamics.