Two articles in the current issue of The Business Lawyer, a publication of the ABA’s Business Law Section, discuss Delaware corporate law decisions.
• Sabin Willet, Gheewalla and the Director’s Dilemma, 64 Bus. Law. 1087 (Aug. 2009)
Did North American Catholic Education Programming Foundation, Inc. v. Gheewalla change anything? The Delaware Supreme Court ruled in 2007 that corporate directors owe no direct fiduciary duty to creditors in insolvency, but the bar seems to have met the case with a collective shrug, concluding that the preservation of a creditor’s right to pursue derivatively on behalf of a distressed corporation a claim for breach of fiduciary duty leaves intact the “fiduciary duty to the corporate enterprise” theory that informed pre-Gheewalla advice.
This Article posits that this general view is wrong. In the vicinity of insolvency, two oft-cited principles—that a board should strive to maximize enterprise value, and that it should protect the shareholders—sometimes are in conflict. In a period where insolvency deepens, a discounted sale may maximize enterprise value, even as it cuts off a less likely, but real prospect of an equity-preserving restructure.
This Article argues that “duty to the enterprise” theory is incoherent and ignores the reality of business valuation, which is that all prospects are uncertain. The necessary consequence of Gheewalla, construed in light of other relevant authorities, is that where any business strategy may generate a return for equity holders, the board must favor that strategy and reject alternatives, even if in the board’s business judgment the strategy is unlikely to succeed, and alternatives, on a risk-adjusted basis, would maximize the enterprise value.
• Lyman Johnson and Dennis Garvis, Are Corporate Officers Advised About Fiduciary Duties?, 64 Bus. Law. 1105 (Aug. 2009)
This Article reports the results of an empirical study of whether and how in-house corporate counsel advise corporate officers about fiduciary duties. The fiduciary duties of officers long have been neglected by courts, scholars, and lawyers, even though executives play a central role in corporate success and failure. The study’s findings, organized by type of company (public or private), size, and attorney position, show several interesting patterns in advice-giving practices. For example, fewer than half of all respondents provided advice to officers below the senior-most rank. The results raise the possibility that, unlike directors who may overestimate their liability exposure, certain shortcomings in giving advice to officers may cause them to underestimate personal liability exposure and engage in more risky behavior than is desirable for the company itself. The Article also offers recommendations for improved practices in advising officers about their duties.