American Corporate Law: Directors' Fiduciary Duties and Liability During Solvency, Insolvency, and Bankruptcy in Public Corporations
| Autor | Florence Shu-Acquaye |
| Cargo | Professor of Law at the Shepard Broad Law Center at Nova Southeastern University |
| Páginas | 1-20 |
AMERICAN CORPORATE LAW: DIRECTORS’ FIDUCIARY DUTIES
AND LIABILITY DURING SO LV E N C Y, INSOLVENCY, AND
BANKRUPTCY IN PUBLIC CORPORATIONS
FLORENCE SHU-ACQUAYE*
I. Introduction ................................................................................................................................................................ 1
II. Brief Overview of the Corporate Board of D irectors & Management .............................................. 3
III. Fiduciary Duty of Corporate Directors: To Whom Is This Duty Owed? ........................................ 6
IV. Liability of Officers and Directors of Solv ent Corporations ................................................................ 7
A. The Duty of Care and the Business Judgment Rule ............................................................................ 7
B. Liability of Officers and Directors during Ins olvency or while Entering the “Zone of
Insolvency” ............................................................................................................................................................. 10
C. Duty of Corporate Officers and Directors du ring Bankruptcy .................................................... 14
V. Statutory Exculpatory Provisions and Directo r’s Fiduciary Duty. .................................................. 15
VI. Advice and Recommendations on How to M inimize Directors’ Personal Liability ............... 17
VII. Conclusion ............................................................................................................................................................ 19
I. INTRODUCTION
This article examines contemporary differences in the fiduciary duties
and liability of corporate directors and officials belonging to non-distressed
public corporations, to corporate entities facing insolvency (approaching
insolvency), and to those that eventually become insolvent. Delaware General
Corporate Law is one of the most advanced and flexible corporation statutes
in the United States. The Delaware Court of Chancery has over 200 years of
legal precedent as a maker of corporate law.1 As a result, cases from that
state are examined in light of the evolving trend in fiduciary duties of
corporate officers and directors.2
In the wake of a declining Wall Street market, exorbitant executive
salaries, and lofty severance packages, frequently accompanied by dismal
company performance, directors’ duties and liability are given a closer look
than ever before.3 Other constituents, such as corporate creditors, believe
* Florence Shu-Acquaye is a Professor of Law at the Shepard Broad Law Center at Nova
Southeastern University.
1 EPSTEIN, FREER, ROBERTS & SHEPHERD, BUSINESS STRUCTURES 165 (Thompson & West, 2nd ed.
2007).
2 The corporate law of the State of Delaware is said to be understood as a kind of de facto
federal law, because most U.S. companies are incorporated in Delaware. See Bernard Black et
al., Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability
(Report to the Russian Securities Agency), 2007 COLUM. BUS. L. REV. 614, 643 (2007).
3 In this vein, some proposed corporate governanc e reforms have been made with the goal
of improving corporate governance, and they i nclude iter alia: i) limiting board discretion
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U.P.R. Business Law Journal
Vol. 2
and often assert that directors owe them a fiduciary duty to consider their
interest. Hence, with insolvency looming, corporate officers and directors
may feel there is little incentive to protect corporate assets for shareholders,
because those assets are likely to go to creditors. On the other hand, officers
and directors may be tempted to use the creditors’ money for their own
benefit or to save the company.4 Yielding to such temptation may expose
directors and officers to personal liability.
However, the true question here is whether there should be a shift in
the directors’ fiduciary duty and liability beyond the shareholders and
corporation as the latter becomes financially distressed. Would a shift like
that be justified? Another relevant question is whether this duty should be
owed to the creditors of the corporation as it approaches insolvency, (i.e.,
enters the “zone of insolvency”) or when it has finally become insolvent.
Furthermore, how does recent case law address directors’ fiduciary issues
under these different corporate contexts? This paper examines the answers
to such questions and proposes some guidelines that may help a distressed
company’s officers and directors limit their exposure to personal liability.
Traditionally, fiduciary duties involve those of care, loyalty and good
faith. The duty of care requires directors to act as reasonable, prudent people
under all circumstances. This requires a deliberative decision-making
process based on full and credible information. The duty of loyalty, in turn,
requires a fiduciary to act in good faith for the benefit of the corporation.
Therefore, this duty prohibits self-dealing, misappropriation of corporate
assets, conflicts of interest, lack of independence, and disloyal conduct.
Lastly, the duty of good faith forbids conduct motivated by intent to impede,
regarding levels a nd structure of executive com pensation (See TARP Standard Compensation
and Corporate Governance, 74 Fed. Reg. 28394 (June 15, 2009) (31 C.F.R. pt. 30); Excessive
Pay Shareholder Approval Act, S. 1006, Cong. 111th (2009); Excessive Pay Capped Deduction
Act of 2009, S. 1007, Cong. 111th (2009); Corporate and Fina ncial Institution Compensation
Fairness Act of 2009, H. R. 3269, Cong. 111th (2009); ii) incr easing shareholder influence in
director elections through right of shareholders to access the company’s proxy for certain
shareholders nominations (SEC Proposing Rel., F acilitating Shareholders Director
Nominations, proposed new Rule 14a-11 of the Securities Exchange Act of 1934; iii)
providing shareholders with “advisory” vote on as pects of executive compensation (see
proposed shareholder Bill of Rights Act, S. 1074, Co ng. 111th (2009); Investor Protection Act
of 2009, H.R. 3817 Cong. 111th (2009) (draft legislation delivered by th e United States
Department of the Treasury to the United Sta tes Congress on July 10, 2009). See The Report
of the Task Force of the ABA Section of Busin ess Law Corporate Governance Committee on
Delineation of Governance Roles & Responsibilit ies, note 3 (August 2009).
4 Alan D. Lasko & Associates, P.C., Avoiding Personal Liability when the Corporation is in the
“Zone of Insolvency ”: A Guide for Directors and Of ficers, (2004),
http://abiworld.net/newsletter/utc/vol2num3/zo ne.pdf (last visited April 4, 2011).
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