A rising number of distressed companies are appointing independent directors or managers (Independents) prior to filing for bankruptcy. Independents—who may act as part of special committees—when properly used add governance credibility and may mitigate creditor scrutiny of restructuring-related transactions or settlements. While the use of Independents can aid a process, they can also hinder or delay the restructuring if used improperly. The key is appointing a disinterested person who acts on the advice of appropriate professionals.

Director Fiduciary Duties, Generally

Directors are responsible for managing the company’s policies and objectives, overseeing company officers and authorizing significant business decisions. They must act in an informed manner that they reasonably believe is in the best interests of shareholders. See N. Am. Catholic Educ. Programming Found. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). Under Delaware law, for example, directors owe the corporation duties of care and loyalty. The duty of care requires that directors act with the care of a reasonably prudent person in similar circumstances and consider all pertinent information reasonably available. See, e.g., In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 749 (Del. Ch. 2005). Delaware law insulates disinterested directors who reasonably and “in good faith” rely on legal, financial or other expert advisors in fulfilling their duty of care. See, e.g., DGCL §141(e). The duty of loyalty, which includes a duty to act in good faith, requires that directors put the interests of the corporation ahead of their own. See, e.g., Quadrant Structured Prods. Co. v. Vertin, 115 A.3d 535, 549 (Del. Ch. 2015). A plaintiff can challenge a director’s loyalty by showing that the director is interested or not independent of someone who was interested. Id. To establish a lack of independence, plaintiffs must show that the directors are beholden to or under the influence of a controlling shareholder such that their discretion would be sterilized. See, e.g., Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). Some states have expanded a director’s fiduciary duties to creditors when the corporation is insolvent. See generally Gheewalla, 930 A.2d at 101.