Pamela S. Palmer, Howard M. Privette, and Douglas D. Herrmann are partners at Troutman Pepper. This post is based on a Troutman Pepper memorandum by Ms. Palmer, Mr. Privette, Mr. Hermann, and Samantha K. Burdick.
As COVID-19 related economic disruptions place unprecedented stress on cash flows, the risk of insolvency is a new and growing concern for many businesses. Against the backdrop of a decades-long growth in corporate debt, boards of directors are making decisions that have the potential for pitting the interests of creditors against the interests of equity shareholders. As the financial health of a business deteriorates, its directors should be cognizant that their fiduciary duties may shift or expand with respect to these different constituencies if and when the company actually crosses over into insolvency.
With a focus on comparing California and Delaware law, this post briefly describes how insolvency can affect directors’ fiduciary duties, and discusses ways that directors can minimize the risk of personal liability as those duties shift.