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FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS

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					FIDUCIARY DUTIES OF DIRECTORS AND OFFICERS AS A CORPORATION APPROACHES INSOLVENCY

H. Wayne Cooper Doerner, Saunders, Daniel & Anderson, L.L.P.

I.

Relevance of Delaware Case Law to Oklahoma Corporations A. Under the “internal affairs doctrine,” the liability of corporate directors for intracorporate affairs depends on the law of the state of incorporation, without regard to the corporation‟s principal place of business.1 1. The Oklahoma legislature adopted the Delaware corporate code in 1986 (with certain exceptions), and has since endeavored to keep up with Delaware amendments. Oklahoma courts interpret the Oklahoma General Corporation Act (OGCA) in accordance with Delaware decisions.2 The “judicial gloss” on the provisions of the Delaware General Corporation Law (DGCL) is substantial.

2.

3.

B. II.

In other jurisdictions, courts look to Delaware decisions for guidance.

Fiduciary Duties Owed by Directors and Officers of Solvent Corporations A. General. Under the OGCA, in the absence of a special provision in the certificate of incorporation, the directors, rather than the shareholders, are given the responsibility to manage the business and affairs of the corporation.3 1. In carrying out their responsibilities, the directors are charged with two primary fiduciary duties to the corporation and its shareholders: The duty of care and the duty of loyalty. 4 However, Delaware courts have held that each primary duty has several additional duties that are “subsets” of the primary duty.

2.

1 2 3 4

Nagy v. Riblet Products Corp., 79 F.3d 572, 575 (7th Cir. 1996). Woolf v. Universal Fidelity Life Ins. Co., 849 P.2d 1093, 1094 (Okla. Ct. App. 1992). 18 Okla. Stat. § 1027.A. Smith v. Van Gokom, 488 A.2d 858, 872-73 (Del. 1985).

B.

Duty of Care. The duty of care requires that directors use that amount of care that ordinarily careful and prudent men or women would use in similar circumstances.5 1. The duty of care requires directors to inform themselves of all material information reasonably available to them before making a business decision, and to act with the requisite degree of care in making the decision.6 A director‟s action (or inaction) will constitute a breach of the duty of care only if the director‟s conduct rises to the level of gross negligence. Under current decisions, “gross negligence” is conduct that constitutes “reckless indifference or actions that are without the bounds of reason,” but stops short of conduct constituting “intentional dereliction of duty or the conscious disregard for one‟s responsibilities.”7

2.

C.

Duty of Loyalty. The duty of loyalty demands that the best interests of the corporation and its shareholders take precedence over any personal interest or bias of a director that is not generally shared by the shareholders. 1. Conflicts of interest do not per se result in breach of the duty of loyalty. The OGCA provides several procedures by which a director to enter into a contract with his corporation, including having the contract approved (after full disclosure to the board) by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors may be less than a quorum.8 In the absence of board or shareholder approval, conduct that has been held to constitute breach of the duty of loyalty includes: usurpation of corporate opportunity; competition by a director or officer with the corporation; use of corporate office; insider trading; and actions that have the purpose or practical effect of perpetuating directors in office.

2.

D.

Subsets of Duty of Loyalty. As noted above, several additional duties have been held by the Delaware courts to constitute subsets of the duty of loyalty. These include: 1. Duty of Good Faith. Although the Delaware courts for many years referred to the duty of good faith as one of the “triad” of duties that directors owe to their corporation (along with the duty of care and duty of loyalty), the Delaware Supreme Court recently held that “the obligation to

5 6 7

8

In re The Walt Disney Co. Derivative Litigation, 907 A.2d 693, 749 (Del. Ch. 2005). Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993). In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27, 66-68 (Del. 2006); McPadden v. Sidhu, 2008 WL 4017052 (Del. 2008) (unpublished). 18 Okla. Stat. § 1030.A.1.

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act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty.” 9 Rather, the duty of good faith is imbedded the duty of loyalty.10 a. Good faith requires an honesty of purpose and a genuine care for the corporation and its shareholders. Conversely, “‟bad faith‟ is not simply bad judgment or negligence, but … implies the conscious doing of a wrong because of dishonest purpose or moral obliquity.”11 Clearly, an action taken, or a failure to act, with the intent to harm the corporation is disloyal and a violation of the duty of good faith. It makes no difference why the director or officer intentionally failed to pursue the best interest of the corporation.12 The Delaware Supreme Court has also held that in particularly egregious cases of director or officer misconduct, proof of a director‟s or officer‟s “intentional dereliction of duty” or a “conscious disregard for one‟s responsibilities,” even though not done with intent to inflict harm on the corporation, can constitute a violation of the duty of good faith (and therefore the duty of loyalty).13

b.

c.

2.

Duty to Exercise Oversight. The duty of loyalty includes a duty to attempt in good faith to assure that an adequate corporate information and reporting system is implemented and monitored. Failure to do so under some circumstances may render directors liable for losses caused by the corporation‟s non-compliance with applicable legal standards.14 a. To find a breach of the duty to exercise oversight (and therefore the duty of loyalty), it must be shown that “(a) the directors utterly failed to implement any reporting or information system or controls, or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention. In either case, imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.”15

9 10 11 12 13

14 15

Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). Id. Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208 (Del. 1993) In re The Walt Disney Co. Derivative Litigation, 907 A.2d 27 693, 753-54 (Del. Ch. 2005). In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27, 66-68 (Del. 2006); Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006). In re Caremark International, Inc. Derivative Liitigation, 698 A.2d 959, 970 (Del. Ch. 1996). Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

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b.

If directors are alleged to have been merely negligent (or even grossly negligent) in implementing and/or monitoring an information system, their liability must be judged under the duty of care rules, not the duty of loyalty.16 To find liability for lack of oversight under the duty of loyalty, there must be “a showing that the directors were conscious of the fact that they were not doing their jobs.”17

III.

Business Judgment Rule A. Presumption. The business judgment rule is a court-made rule derived from the statutory authority granted to the board of directors to manage the business and affairs of the corporation. It creates a presumption that in making a business decision the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the corporation.18 1. The effect of the presumption is that, as long as a board has complied with its duties of loyalty and care, a court will not substitute its judgment for that of the board if the board‟s decision can be “attributed to any rational purpose.”19 The policy behind the rule is that businessmen and women are perceived to possess skills and information not possessed by reviewing courts and “because there is great social utility in encouraging the allocation of assets and the evaluation and assumption of risk by those with such skill and information, courts have long been reluctant to second-guess such decisions when they have appeared to have been made in good faith.”20 The protections of the business judgment rule do not apply unless the directors are shown to have actually exercised their business judgment in a matter.21 If the board has failed to act, or has abdicated its responsibilities, the rule generally does not apply. However, not all director inaction will result in loss of protection of the rule, since a conscious decision by a board to refrain from acting may itself be a valid exercise of business judgment.22

2.

3.

B.

Rebuttal of the Presumption. A well-pled allegation of a breach of either the duty of loyalty or the duty of care by the directors rebuts the presumption that the directors have acted in the best interests of the corporation and its shareholders,

16 17 18 19 20 21 22

Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 799 n. 80 (Del. Ch. 2004). Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003). Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1984). Unocal Corp. v. Mesa Petrolium Co., 493 A.2d 946, 954 (Del. 1985). In re J.P. Stevens & Co. Shareholders Litigation, 542 A.2d 770, 780 (Del. Ch. 1988). Aaronson v. Lewis, 473 A.2d 805, 813 (Del. 1984). In re The Walt Disney Co. Derivative Litigation, 907 A.2d 27 693, 748 n. 416 (Del. Ch. 2005).

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and shifts the burden to the directors to prove that their decision was in the “entire fairness” of the corporation and its shareholders. 1. A common allegation of breach of duty of loyalty that will shift the burden of proof is that a board had an interest in the transaction, such as where the directors vote themselves stock options or other elements of their compensation.23 However, to rely upon breach of duty of care to shift the burden of proof, the plaintiff must allege facts, which if true, would constitute gross negligence on the part of the board.24 As noted above, “gross negligence” includes conduct that constitutes “reckless indifference” or “actions that are without the bounds of reason,” but stops short of conduct indicating bad faith, such as “intentional dereliction of duty or the conscious disregard for one‟s responsibilities.”25 In this regard, two important provisions of the OGCA provide added protection to the board: a. First, § 1027 of the OGCA provides that a member of the board shall, in the performance of such member‟s duties, be fully protected in relying in good faith upon the records of the corporation, and upon such information, opinions, reports or statements presented to the corporation by any of the corporation‟s officers or employees, or by any expert selected with reasonable care by or on behalf of the corporation.26 Second, § 1006.B.7 of the OGCA permits a corporation‟s certificate of incorporation to eliminate or limit the personal liability of a director to the corporation or its shareholders for breach of fiduciary duty; however such a provision may not limit the liability of a director for (1) breach of the duty of loyalty, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) for liability for unlawful dividends or share repurchase or redemptions, or (4) for any transaction in which the director derived an improper personal benefit.27 i. The effect of such a provision in a certificate of incorporation is to permit the elimination of monetary liability of a director for breach of the duty of care, even if the director is alleged to be grossly negligent.28

2.

b.

23 24 25

26 27 28

Gottlieb v. Heyden Chem. Corp., 91 A.2d 57, 58 (Del. 1952). Smith v. Van Gokom, 488 A.2d 858, 873 (Del. 1985); Aaronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27, 66-68 (Del. 2006); McPadden v. Sidhu, 2008 WL 4017052 (Del. Ch. 2008) (unpublished opinion). 18 Okla. Stat. § 1027.E. 18 Okla. Stat. § 1006.B.7. McPadden v. Sidhu, 2008 WL 4017052 (Del. Ch. 2008) (unpublished opinion).

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ii.

The combination of the business judgment rule and §§ 1027.E and 1006.B.7 of the OGCA generally provides a basis for a court to dismiss, as a matter of law, counts against directors alleging breach of the duty of due care. (Note, however, that § 1006.B.7 is only available for directors, not officers.29) In the face of a § 1006.B.7 exculpation clause in the certificate of incorporation, the typical way to rebut the presumption created by the business judgment rule is to attempt to plead facts showing a breach of the duty of loyalty, including the duty of good faith and duty to exercise oversight, since liability for these acts cannot be exculpated under § 1006.B.7.

iii.

3.

Absent dismissal, in certain circumstances, the burden of proof can shift back to the plaintiff if the directors can show that the decision was made or ratified by the majority of the disinterested directors or the shareholders.30

IV.

Effect of a Corporation’s “Insolvency” A. Derivative Actions. In a 2007 case, the Delaware Supreme Court held that, until the moment of a corporation‟s “insolvency,” creditors of the corporation have no standing to assert derivative claims against directors or officers of the corporation for breach of fiduciary duty.31 1. After insolvency, the corporation‟s creditors become the “principal constituency injured by any fiduciary breaches that diminish the firm‟s value,” and they therefore have the same standing and incentive to pursue derivative claims on the corporation‟s behalf that shareholders have when the corporation is solvent.32 Earlier cases had held that additional fiduciary duties may be owed by directors and officers just before the corporations reaches insolvency; i.e., when the corporation is in the “zone of insolvency.”33

2.

29

30 31 32 33

Id. (despite allegations of gross negligence on the part of the directors and an officer, court dismissed claim of breach of duty of care against directors based upon Delaware‟s counterpart to § 1006.B.7, but not against officer). In re The Walt Disney Co. Derivative Litigation, 907 A.2d 27 693, 748 n. 412 (Del. Ch. 2005). North American Catholic Educational Programming Fnd, Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). Id., 930 A.2d at 101. E.g., Weaver v. Kellogg, 216 B.R. 563, 582-84 (S.D. Tex. 1997); Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 1991).

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The policy behind denying creditors the right to assert fiduciary duty claims derivatively prior to insolvency is that creditors are often protected by strong covenants, liens on assets, and other negotiated contractual protections, as well as the law of fraudulent conveyance.34

B.

Direct Actions. In the same 2007 case, the Delaware high court also ruled that, whether before or after the corporation becomes insolvent, a creditor may not assert a direct action against directors or officers for breach of fiduciary duty. 35 1. An earlier Chancery Court decision had held that a direct claim for breach of fiduciary duty could be possible where directors exhibited a “marked degree of animus towards a particular creditor with a proven entitlement to payment.”36 The rationale for denying creditors the right to direct actions for breach of fiduciary duty is that directors must be free to exercise their business judgment to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and therefore must have the freedom to engage in “vigorous, good faith negotiations with individual creditors for the benefit of the corporation.”37

2.

V.

Definition of “Insolvency” B. OGCA. For purposes of determining when fiduciary duties of directors and officers shift to a corporation‟s creditors, “insolvency” occurs on the date the corporation fails either a “balance sheet” test or an “ability-to-pay” test.38 1. The “balance sheet” test fails when there is a “deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof.”39 a. The value of the assets is the amount that would be realized from the sale of the assets within a reasonable period of time, considering the age and liquidity of the assets, as well as the conditions of the trade. The value at which the assets are carried for financial accounting or tax purposes is irrelevant.

b.

34 35 36 37 38 39

North American Catholic Educational Programming Fnd, Inc. v. Gheewalla, 930 A.2d 92, 100 (Del. 2007). Id., 930 A.2d at 103. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 790-91 (Del. Ch. 2004). Id. Geyer v. Ingersoll Pub. Co., 621 A.2d 784, 789 (Del. Ch. 1992). Id.

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c.

Liabilities are determined under the assumption that the debts are to be paid according to the present terms of the obligations.

2.

The “ability-to-pay” test fails when there is an “inability to meet maturing obligations as they fall due in the ordinary course of business.”40 For fiduciary duties to shift to creditors, all that is required is that there be insolvency in fact. A statutory filing, such as a bankruptcy filing, is not a prerequisite.41 The problem is, of course, that under either test there is no method by which the directors and officers will be able to determine the exact date of “insolvency” on a “real time” basis. It usually can only be determined in hindsight.

3.

4.

B.

Oklahoma Uniform Fraudulent Transfer Act. Under the Oklahoma Uniform Fraudulent Transfer Act (OUFTA), insolvency is determined by a “balance sheet” test. A debtor is “insolvent” if the “sum of the debtor‟s debts is greater than all of the debtor‟s assets at fair valuation.”42 Further, a “debtor who is generally not paying his debts as they become due is presumed to be insolvent.”43 1. For purposes of the “balance sheet” test under OUFTA, assets do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable pursuant to the provisions of the OUFTA.44 Debts do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.45

2.

C.

U.S. Bankruptcy Code. Under the U.S. Bankruptcy Code, “insolvency” is also defined by a “balance sheet” test. A corporation is “insolvent” when the sum of the corporation‟s debts is greater than all of the corporation‟s property, at a fair valuation, exclusive of property transferred, concealed or removed with intent to hinder, delay or defraud the corporation‟s creditors.46 1. “Debt” means liability on a claim.47

40 41 42 43 44 45 46 47

Id. Id. 24 Okla. Stat. § 114.A. 24 Okla. Stat. § 114.B. 24 Okla. Stat. § 114.D. 24 Okla. Stat. § 114.E. 11 U.S.C. § 101(32)(A). 11 U.S.C. § 101(12).

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2.

“Claim” means (a) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (b) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.48

VI.

Actions Against Directors and Officers for “Deepening Insolvency” A. The Trenwick Decision. In a 2007 case, the Delaware Supreme Court, pursuant to an order affirming the judgment of the Chancery Court “on the basis of and for the reasons assigned by the Court of Chancery in its opinion,”49 held that Delaware does not recognize a cause of action for so-called “deepening insolvency.” The court stated that “Delaware law imposes no absolute obligation on the board of a company that is unable to pay its bills to cease operations and to liquidate. Even when the company is insolvent, the board may pursue, in good faith, strategies to maximize the value of the firm.”50 If those strategies involve the incurrence of additional debt, the board does not become a guarantor of that strategy‟s success. That the strategy results in continued insolvency and an even more insolvent entity does not in itself give rise to a cause of action.51 1. The court noted that rejection of an independent cause of action for deepening insolvency does not absolve directors of insolvent corporations of responsibility, since directors can still be subject to derivative claims by creditors for breach of fiduciary duty. However, if a creditor cannot state a claim that the directors breached the duty of loyalty or care in implementing a business plan, it may not cure that deficiency simply by alleging that the corporation became more insolvent as a result of the failed strategy.52 The Trenwick court was highly critical of earlier federal court decisions that had recognized deepening insolvency as a cause of action under Pennsylvania, New York, Delaware and North Carolina law.53

2.

48 49

50

51 52

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11 U.S.C. § 101(5). Trenwick America Litigation Trust v. Billett, 907 A.2d 438 (Del. 2007), affirming Trenwick America Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 204 (Del. Ch. 2006). Trenwick America Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 204 (Del. Ch. 2006). “[T]he fact of insolvency does not render the concept of „deepening insolvency‟ a more logical one than the concept of „shallowing profitability.‟‟” 906 A.2d at 205. Id., 906 A.2d at 205; accord, In re Radner Holdings Corp., 353 B.R. 820, 842 (Bankr. D. Del. 2006). Id., 906 A.2d at 205. See In Re The Brown Schools, 386 B.R. 37, 47 (Bankr. D. Del. 2008) (claims for breach of the duty of loyalty in the form of self-dealing held not to be “deepening insolvency” claims in disguise.) See, e.g., Official Committee of Unsecured Creditors v. R.F. Lafferty & Co, 267 F.3d 340, 374 (3d Cir. 2001) and other cases cited in the court‟s opinion at 906 A.2d at 206 n. 106. The court stated these federal courts “became infatuated with the concept, but did not look closely enough at the object of their ardor.”

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The concept of deepening insolvency as a cause of action has been challenged in other jurisdictions as well.54

B.

The Bridgeport Decision. A 2008 case from the Delaware Bankruptcy Court55 involved claims by the trustee in bankruptcy against the former directors of Micro Warehouse for breach of the duty and care and duty of loyalty in connection with the sale of the Micro Warehouse‟s assets the day before the corporation filed for bankruptcy. 1. Mico Warehouse was acquired in January 2000 at the height of the dotcom boom by a group of investors in a leveraged buyout financed by a syndicate of 18 financial institutions led by First Boston. One year after the LBO, the corporation suffered a significant downturn. Erosion of the company‟s financial condition continued for the next two years, requiring numerous renegotiations of loan covenants with the Senior Lenders. In June 2003 the Secured Lenders urged the corporation to hire a restructuring advisor, but the board delayed doing so until August 2003. The advisor‟s restructuring professional, Ramaekers, was named COO. a. Within 72 hours after his arrival, Ramaekers determined that the best course was for the company to sell its assets. Rather than commence a competitive bidding process, however, Ramaekers talked only with CDW Corporation, whose CEO was an acquaintance of one of Micro Warehouse‟s directors. Ramaekers did not hire an investment banker to “shop” the company, nor did he otherwise conduct a thorough search for a potential strategic buyer. The sale of Mico Warehouse‟s assets to CDW was consummated on September 9, 2003 for $28 million. On September 10, Mico Warehouse filed Chapter 11.

2.

b.

c.

d.

e. 3.

The trustee sued CDW Corporation under a fraudulent conveyance theory and obtained a settlement of $25 million. In the course of that proceeding, an officer of CDW testified that at the time of the purchase CDW valued the assets at $128 million. In addition, the court heard testimony that that several potential buyers of the assets had expressed an interest in bidding but were denied access to due diligence materials because of a lock-up agreement between Micro Warehouse and CDW.

54

55

In re SI Restructuring, Inc., 532 F.3d 355, 362-64 (5th Cir. 2008); Fehribach v. Ernst & Young, LLP, 493 F.3d 905, 909 (7th Cir., 2007). In re Bridgeport Holdings, Inc., 388 B.R. 548 (Bankr. D. Del. 2008).

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The trustee then sued the directors of Mico Warehouse, along with Ramaekers, for breach of fiduciary duties of care, loyalty and good faith, alleging that: a. the directors disregarded the financial “red flags” and painted an unjustifiably rosy picture of the corporation‟s future to the corporation‟s lenders, the directors ignored their responsibilities to the corporation by delaying too long in deciding to sell the assets; the directors delayed too long in hiring a restructuring advisor, the directors abdicated crucial decision-making authority to Ramaekers, and failed to supervise Ramaekers adequately, and the directors‟ failure to either sell or restructure the corporation earlier, combined with their abdication of responsibility to Ramaekers, resulted in an uninformed and hurried sale of the corporation‟s assets for a grossly low price.

b.

c. d.

e.

5.

The directors moved to dismiss the breach of duty of loyalty claim on the basis that there was no allegation the directors had any interest in the transaction or lacked independence in approving the sale. The court declined to dismiss the claim, holding that “where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary duty in good faith.”56 a. But see Stone v. Ritter: “Failure to act in good faith requires conduct qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence).”57 Clearly, the board could be said to have acted with “reckless indifference” and “without the bounds of reason,” (i.e., gross negligence), but did it reach the level of “intentional dereliction of duty or the conscious disregard for one‟s responsibilities” that the Delaware Supreme Court has said is necessary to show bad faith?

b.

56 57

In re Bridgeport Holdings, Inc., 388 B.R. 548, 564 (Bankr. D. Del. 2008). Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

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d.

See also McPadden v. Sidhu: “There is no basis in policy, precedent or common sense that would justify dismantling the distinction between gross negligence and bad faith.”58

6.

The directors moved to dismiss the breach of duty of care claim based on an exculpatory provision in the corporation‟s certificate of incorporation that was Delaware‟s counterpart to OGCA § 1006.B.7. a. Without articulating its reasoning, the court summarily ruled that the exculpatory clause in the charter did not require dismissal of the duty of care claim.59 The court seemed to imply that, as a matter of law, the due care claims were so inextricably intertwined with the loyalty and bad faith claims that the exculpatory clause was not a bar to recovery.

b.

C.

Observations. Under Trenwick, it is clear that the board of a company that is unable to pay its bills is under no absolute obligation to cease operations and to liquidate, but is instead free to pursue in good faith strategies that do not involve liquidation for the purpose of maximizing the value of the firm. However, under Revlon, once a board determines to sell a company, it must set its singular focus on seeking and attaining the highest value reasonably available to the stockholders.60 Further, under Unocal, any deal protection measures included in the transaction documents, such as “lock-up” clauses or “break-up” fees, must not be preclusive or coercive and reasonable in light of the circumstances.61 1. Bridgeport could be characterized as nothing more than a botched Revlon sale. Even boards that have been found to be grossly negligent in handling Revlon sales have still avoided liability under the exculpation clauses in their certificates of incorporation. In the absence of self-dealing, Delaware courts typically go to great lengths to explain why gross negligence should not be equated with acting in bad faith.62 There is an underlying conflict-of-interest issue in Bridgeport that the court did not articulate in its opinion. By selling the corporation‟s assets on the eve of bankruptcy, the company avoided a court-supervised sale under § 363 of the Bankruptcy Code and also allowed Ramaekers to be paid his fee.

2.

58 59 60 61 62

McPadden v. Sidhu, 2008 WL 4017052 (Del. Ch. 2008) (unpublished opinion). In re Bridgeport Holdings, Inc., 388 B.R. 548, 572 (Bankr. D. Del. 2008). Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). McPadden v. Sidhu, 2008 WL 4017052 (Del. Ch. 2008) (unpublished opinion). But see Ryan v. Lyondell Chemical Company, 2008 WL 2923427 (Del. Ch. 2008), appeal accepted, 2008 WL 4294938 (Del. 2008) (despite obtaining a 45% premium over market price, directors were denied a motion to dismiss because the record did not reflect the directors‟ good faith discharge of their Revlon duties.)

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3.

Bridgeport was not a decision on the merits, but only a denial of the directors‟ motion to dismiss as a matter of law. However, risk of trial is exactly what OGCA § 1006.B.7 was designed to avoid.

November 19, 2008

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