New Delaware Supreme Court Opinion Limits D&O Claims of Insolvent Companies
by Stuart Larsen
Kahn Kleinman LPA; Cleveland
Solvent corporations can generally do whatever they like with their assets. Officers and directors only have to account to their shareholders. On the other hand, insolvent corporations and those in the “zone of insolvency” may be required to consider the interest of creditors. The Delaware Supreme Court recently clarified the limitations on potential liability for officers and directors of companies that are insolvent or in the zone of insolvency. The court held that creditors cannot bring direct claims against officers and directors of insolvent companies and companies in the zone of insolvency. Creditors may only bring derivative claims against the officers and directors for damages suffered by the insolvent corporation.
Delaware Supreme Court’s Decision in Gheewalla Returns Clarity and Consistency to Creditors' Rights
by James Gadsden
Carter Ledyard & Milburn LLP; New York
Creditors finally have a definitive answer. The Delaware Supreme Court has now held in North American Catholic Educational Programming Foundation Inc v. Gheewalla that creditors cannot directly sue directors of an insolvent debtor corporation for breach of fiduciary duty. There is no dispute that once a corporation is insolvent, creditors, not shareholders, are the parties entitled to a corporation’s assets. As a result, creditors are empowered by law to enforce compliance with the duties of care and loyalty the directors owe to the corporation. However, since the Delaware Chancery Court’s decision in Credit Lyonnais Bank Nederland N.V. v. Pathe Communications Corp. there has been a vigorous debate concerning the nature and potential extent of a director’s fiduciary duty to a creditor. The Gheewalla decision clarifies that directors of insolvent corporations owe no direct duty to creditors. Instead, the court reaffirmed that creditors simply replace shareholders as the class of interested parties entitled to enforce the fiduciary duties directors owe the insolvent corporation through a derivative action. According to the court, holding otherwise would be inconsistent with the other protections available to creditors and undermine the deference afforded the business judgment of directors. This article explores the court’s reasoning in Gheewalla and discusses the practical implications of this important decision.
Hedge Funds: The New Players at the Chapter 11 Table
Panelists:
Thomas Vanderslice
Marathon Asset Management; New York
David S. Lorry
Chrysalis Capital Partners, LP; Philadelphia
Peter V. Pantaleo
Simpson Thacher & Bartlett LLP
Eric Reehl
Plainfield Asset Management
Hon. James M. Peck
U.S. Bankruptcy Court; New York
A bigger stake means a more active, involved player. This means more accountability, better corporate decision-making. More liquidity in the market means more options for the distressed debtor, and thus less distress. Borrowers are able to refinance problems and thus often buy time to address them.
Hedge funds are willing to provide rescue financing on more aggressive
terms in exchange for upside reward.
E.g., Aloha Airlines – hedge fund lenders received an exclusive right to propose an emergence transaction and obtain exit “success” fees, in exchange for DIP financing.
An ROI focus creates a heightened appetite for equity and thus more flexibility for debtors. Rights offerings, driven by hedge fund money, are now an important source of exit financing.
Read the full article. (Materials from the 2007 Annual Spring Meeting)
Hedge Funds: Lessons Learned from the Radnor Decision
by Mark Berman
Nixon Peabody LLP; Boston
Jo Ann J. Brighton
Kennedy Covington Lobdell & Hickman;
Charlotte, N.C.
There's a new player seated at the financial table: hedge funds. While hedge funds "were originally designed to invest in equity securities and use leverage and short-selling to 'hedge' the portfolio's exposure to movements of the equity markets, hedge funds utilize a wide variety of investment strategies and techniques." Many hedge funds are very active traders of debt and equity securities and have been showing up more often in the market for distressed investments, which leads them to be involved in bankruptcy proceedings.
Read the full article. (Reprinted from the February 2007 ABI Journal)