Fiduciary Duties When A Corporation Is Insolvent or In the Zone of Insolvency
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Message: Time & Sales - Tuesday 10/31/17 Vol 279,250 Closed at $0.00423
INSOLVENCY AND FIDUCIARY DUTIES: ADVISING DIRECTORS AND OFFICERS WHEN THE COMPANY CANNOT PAY ITS BILLS
Bankruptcy Bulletin - Delaware Supreme Court Clarifies Fiduciary Duties When A Corporation Is Insolvent or In the Zone of Insolvenc
I. DIRECTORS AND OFFICERS FIDUCIARY DUTIES.
Generally, directors and officers fiduciary duties comprise the duty of loyalty and the duty of care. Under Delaware law, corporate officers and directors have identical fiduciary duties. See Cant/er v. Stephens, 965 A.2d 695, 708-09 (Del. 2009). So long as the directors and officers comply with these duties, they are entitled to the protections of the business judgment rule. When the business judgment rule applies, a court will not typically substitute its own view for those of directors and officers or second-guess the outcome of business decisions by holding a director or officer personally liable for a mistake in judgment. Each of these duties is discussed more fully below.
A. The DutyofLoyalty
1. In dealings with and on behalf of the corporation, directors owe a fiduciary duty of loyalty to the corporation, which demands that there be no conflict between the corporation's interest and the director's interest.
Directors must avoid self-dealing, observe confidentiality obligations, and not abuse corporate opportunities for personal gain.
A disqualifying interest can exist because a director is "dominated" or "controlled" by a party interested in a corporate transaction.
Challenges to conflicts of interests can be cured by a showing that an action was approved by a majority of disinterested directors who were informed of the conflict.
2. The duty of loyalty includes the obligation to act in good
faith with "a true faithfulness and devotion to the interests of the corporation and its shareholders."
• A failure to act in good faith could be shown where a director intentionally acts with a purpose other than that of advancing the best interests of the corporation, acts with the intent to violate applicable law, or intentionally fails to act in the face of a known duty to act.
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In matters before the board, a director must inform fellow directors of any conflict of interest.
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When seeking shareholder action on a matter involving a conflict of interest, an interested director must disclose to all shareholders such conflict of interest.
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