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| vol 17, num 2 | September, 2020 |
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| Common Defenses to Claims for D&O Breach of Duty |
| Directors have an unyielding fiduciary duty to protect the interests of the corporation and the stockholders alike. Claims for breaching this duty could result in personal liability and a large money judgment.
There are two main types of defenses to claims for breach of the duty of care: (1) defenses as to liability (e.g., business judgment rule, statute of limitations, and lack of standing) and (2) defenses as to the amount of damages. This article provides a synopsis of both defenses.
A. MOST COMMON DEFENSES AS TO LIABILITY
1. Business Judgment Rule (Duty of Care)
The Business Judgement Rule and the Entire Fairness Standard are Standards of Review — they are the lenses through which courts look at director conduct to determine whether there has been a breach of fiduciary duty.
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| Making Sense of the D&O Policy Proceeds Puzzle in Bankruptcy |
| The increasing size and complexity of modern corporations has contributed to a growing necessity for directors’ and officers’ (D&O) liability insurance policies. It is well-settled that when a corporation goes into bankruptcy, D&O insurance policies themselves are property of the bankruptcy estate and thus subject to the automatic stay. However, there is disagreement among the courts on whether the proceeds of these insurance policies should be classified as property of the estate. Despite the split among the courts on whether D&O insurance proceeds are property of the bankruptcy estate, three shared concerns animate the
courts’ analyses: (1) what the language of the policy says about who is covered (i.e. A-side, B-side, or C-side); (2) the potential depletion of the estate as compared to the harm to directors and officers; and (3) whether the coverage is merely speculative or actual. |
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| D&O Liability in the Mexican Bankruptcy Law |
| In Mexico, only business debtors, trusted estates, and legal entities that are incorporated under mercantile laws are eligible to file for bankruptcy. The most common commercial companies incorporated in Mexico are Sociedad Anónima (limited liability stock corporations) and Sociedad de Responsabilidad Limitada (limited liability partnerships), which are governed by the Ley General de Sociedades Mercantiles (General Commercial Companies Law).
Directors and Officers (D&Os) of a commercial company are jointly liable for breaching the obligations inherent in their charge. D&Os are obliged to comply with the company's bylaws, to abstain from voting in cases where they may have a conflict of interests, to maintain confidentiality, to maintain accounting records according to the law, to execute the shareholders' resolutions, to inform the statutory auditor about any irregularities of the former D&O, to timeously submit the financial statements, and to abstain from distributing dividends if the applicable reserves are not constituted. If the company is publicly held according to the Ley del Mercado de Valores (Stock Market Law), the additional obligations include informing the board of any relevant information, reporting irregularities to the auditing body or external auditor, and to remain loyal
to the company.
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| How to Determine Whether Actions Against Third Parties are Property of a Debtor’s Estate |
| When bankruptcy fiduciaries are appointed, one of their many duties is to identify and monetize property of the debtor’s estate. Frequently, such property may include a corporate debtor’s causes of action against its officers and directors, and related causes of action against the debtor’s professionals whose negligence may have driven the debtor into bankruptcy. In that context, disputes often arise as to whether a particular cause of action belongs to the debtor’s estate, or to certain, or all, of the debtor’s creditors.
Although most courts agree that whether an action may be maintained by the bankruptcy estate depends on whether the debtor could have brought the action prior to filing for bankruptcy, courts have not been consistent in their interpretation of the applicable state laws that underlie these causes of action.
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| Register Today |
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| Registration is now open to join ABI and 15 other insolvency organizations on September 16 as we kick off one of the most encompassing commercial global insolvency events ever! Insolvency 2020 will bring together thought leaders from the worlds of restructuring, insolvency and distressed debt for six weeks of insightful programming and unique networking events. |
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