The credit crunch and resulting recession have led to unprecedented instability for many companies across all sectors. As companies have faced significant challenges, corporate counsel have had to address a range of issues which were unimaginable during the boom years. In situations of financial distress, corporate counsel have had to work under pressure to provide their boards and management with prompt, practical and prudent advice on how to approach the difficult legal issues raised by recent events. Given the weak economic environment and ongoing credit constraints, companies and their corporate counsel will likely face further tests and challenges over the next few years.
Seventeen years ago, the Delaware Chancery Court launched a thousand client alerts by opining in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., Del.Ch., C.A. No. 12150, that “in the vicinity of insolvency, a board of directors is not merely the agent of the [stockholders], but owes its duty to the corporate enterprise.” The court added in a footnote that, in this “zone of insolvency,” the efficient and fair course may diverge from the course that the stockholders, or any single group of stakeholders, might take. These comments were seized upon to posit that when a corporation entered this indeterminable zone, the fiduciary duties of directors shifted, from being owed to the corporation and its stockholders to the corporation and its creditors. At the time, many interpreted the Credit Lyonnais decision as empowering creditors with the right to assert direct claims against corporate directors.
