In these uncertain times, boards of directors face many important decisions about a company’s present and future actions, including reduction or suspension of dividends, layoffs, asset sales, unsolicited takeover offers, liquidation and even insolvency proceedings. In making these decisions, directors should remember their overarching responsibility for continuing oversight and informed decision-making.
In Wagner v. United National Insurance Co. et al. (click here to read the decision), the Supreme Court of Nebraska affirmed a district ruling that a regulatory exclusion in a D&O policy excluded coverage for the underlying action brought by the Director of Insurance of the State of Nebraska in his capacity as the bankruptcy liquidator of the insured, an insolvent insurance company.
On January 13, 2009, in Fisk Ventures, LLC v. Segal, the Court of Chancery of Delaware considered the petition by an investor to have Genetrix, LLC dissolved because it was no longer “reasonably practicable” to continue to operate the company when the company had no operating revenue, no prospects of equity or debt infusion, a deadlocked board of directors and an operating agreement that gave no means of navigating around the deadlock. The court found in favor of the investor and concluded that judicial dissolution was the best and only option for the members in the company.
Directors and officers managing corporations, especially when the corporation is insolvent or operating in insolvency situations, need to be cognizant of their fiduciary duties. This alert provides a brief overview of these fiduciary duties, including practical considerations in the exercise of these duties.
Fiduciary Duties When a Corporation is Solvent
The recent economic tumult brings to the forefront the issue of fiduciary duties in the context of insolvency – an unfortunate circumstance faced by an increasing number of boards of directors and shareholders in these troubled times.
In light of the possibility that several hundred FDIC-insured banks and thrifts may fail in the next two- to three-year period, many clients and friends of the firm have requested a summary of the legal concerns that arise for officers and directors immediately following the seizure of an institution by the FDIC, as well as steps that may be taken to be better prepared before a failure.
The U.S. Bankruptcy Court for the Southern District of New York recently prohibited insurers from terminating debtors' insurance contracts based on so-called "cesser" clauses, which provided for the automatic termination of insurance coverage upon the commencement of proceedings under any bankruptcy or insolvency law. LaMonica v. N. of Eng. Protecting & Indem. Ass'n Ltd. (In re Probulk Inc.), 407 B.R. 56 (Bankr. S.D.N.Y. 2009).
In a troubled economy where businesses are struggling to survive, it is no surprise that many organizations find themselves insolvent or nearly insolvent. Directors of insolvent or nearly insolvent organizations are facing the question of to whom they owe their duty of loyalty, and whose best interest must they consider when making decisions. When in the zone of insolvency, directors still owe a duty to stakeholders to act in their best interests.
CIT Group Inc.