Bankruptcy

Fiduciary Duties Of Officers And Directors Of Failing Companies During "Zone Of Insolvency"

By Scott Riddle

As more and more companies seek bankruptcy protection, we may see more bankruptcy cases involving officer and director liability during the "zone of insolvency" preceding the filing.   Since most states look to Delaware for guidance on matters of corporate law, it is important to keep up with the significant decisions of Delaware courts. 

Francis Pileggi has some recent discussions on his Delaware Corporation Litigation Blog on the fiduciary duties of officers and directors of failing companies.  In January, he reviewed the Delaware case of Gantler v. Stephens.  

In Gantler v. Stephens, (Del. Supr., Jan. 27, 2009), read opinion here, the Delaware Supreme Court, yesterday,  issued a major decision on important matters of Delaware corporate law. Delaware's High Court  for the first time confirmed and clarified that officers of Delaware corporations have the same fiduciary duties as directors of Delaware corporations.

In addition, the Delaware Supreme Court clarified and enunciated Delaware common law on the issue of  "shareholder ratification"...

More recently, Francis blogged from the annual ABA Meeting in Chicago and posted an article entitled Fiduciary Duties of Failing Companies.

This post includes a few highlights from a panel presentation entitled 'The Expanding Role of Fiduciary Duties in Challenging Times', and addresses a topic of great interest to readers of this blog: The duties of directors and officers in the context of a failing business, or one in the 'zone of insolvency'

Delaware Supreme Court Justice Henry duPont Ridgely and Kurt Heyman, an experienced Delaware corporate litigator, were on the panel that discussed recent Delaware opinions that describe fiduciaries duties in general as well as in the context of a failing business...The Gantler case held that officers have the same fiduciary duties as directors, but also noted that the protections of DGCL Section 102(b)(7) do not protect officers. Kurt explained that the Gantler decision raises three (3) fundamental questions:

(1) what is an officer?
(2) what does it mean for officers to have 'identical' fiduciary duties to directors'
(3) what are the consequences of the foregoing?

Finally, The Harvard Law School Forum on Corporate Governance published an article today on Officers and Directors Insurance, which includes a discussion about bankruptcy. 

D&O policies should be reviewed with an eye on how the coverage provided would be affected by the bankruptcy of the insured company. The best time for such a review is when the company is financially stable. Certain policy provisions may help insureds respond to an argument by a bankruptcy trustee or creditors committee that a D&O insurance policy is an asset of the bankrupt estate and is subject to the automatic bankruptcy stay. These provisions include, for example, ones that provide (a) that insured individuals seeking payments from the insurer have priority over claims for coverage by the insured company, and (b) that it is the intention of the insurer and the insureds that insurance payments to individuals are not to be subject to a bankruptcy stay. Other beneficial bankruptcy-related terms provide (y) that, if the company is legally permitted to indemnify an individual but cannot do so because of financial insolvency, the insurer will provide coverage to that individual without the deductible that would usually apply to an indemnifiable claim, and (z) that a claim brought by a bankruptcy trustee or creditors committee on behalf of the estate is carved-out from the 'insured versus insured' exclusion.

Full post as published by Georgia Bankruptcy Blog on August 08, 2009 (boomark / email).