Written by Chip Phinney and Kevin Walsh
Directors of an insolvent corporation face a host of difficult questions. Should they wind up operations or file for bankruptcy to preserve assets for creditors, or chart a riskier course that could lead the company back to profitability and possibly create value for shareholders? If they choose the riskier course and it fails, will the directors be potentially liable to creditors?
The opinion issued by Vice Chancellor Laster of the Delaware Court of Chancery earlier this month in Quadrant Structured Products Co., Ltd. v. Vertin, C.A. No. 6990-VCL, slip op., 2014 Del. Ch. LEXIS 193 (Del. Ch. Oct. 1, 2014), reconsideration denied, 2014 Del. Ch. LEXIS 214 (Del. Ch. Oct. 28, 2014), addresses these issues in depth and makes it clear that directors’ strategic decisions about how best to maximize the value of an insolvent Delaware corporation are protected by the business judgment rule, even though they benefit the corporation’s shareholders while putting creditors at risk:
“[W]hen directors make decisions that appear rationally designed to increase the value of the firm as a whole, Delaware courts do not speculate about whether those decisions might benefit some residual claimants more than others.”
Where directors approve direct transfers of value from an insolvent corporation to a controlling shareholder or related party, however, they risk liability to creditors. To learn more, click here.