Managers' Fiduciary Duties in Financially Distressed Corporations: Chaos in Delaware (and Elsewhere)

35 Pages Posted: 22 Feb 2008

See all articles by Rutheford B. Campbell

Rutheford B. Campbell

University of Kentucky - College of Law

Christopher W. Frost

University of Kentucky - College of Law

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Abstract

The inherent conflict between creditors and shareholders has long occupied courts and commentators interested in corporate governance. Creditors holding fixed claims to the corporation's assets generally prefer corporate decision making that minimizes the risk of firm failure. Shareholders, in contrast, have a greater appetite for risk, because, as residual owners, they reap the rewards of firm success while sharing the risk of loss with creditors.

Traditionally, this conflict is mediated by a governance structure that imposes a fiduciary duty on the corporation's managers - its officers and directors - to maximize the value of the shareholders' interests in the firm. In this traditional view, officers, and directors serve as agents of the shareholders and thus are charged with a fiduciary duty to maximize the value of the principals' ownership interests. Under this model of corporate governance, managers are not agents for the company's creditors and thus owe no fiduciary duty to act in the best interests of creditors.

JEL Classification: K22

Suggested Citation

Campbell, Rutheford B. and Frost, Christopher W., Managers' Fiduciary Duties in Financially Distressed Corporations: Chaos in Delaware (and Elsewhere). Journal of Corporation Law, Vol. 32, No. 3, 2007, Available at SSRN: https://ssrn.com/abstract=1096309

Rutheford B. Campbell (Contact Author)

University of Kentucky - College of Law ( email )

620 S. Limestone Street
Lexington, KY 40506-0048
United States

Christopher W. Frost

University of Kentucky - College of Law ( email )

620 S. Limestone Street
Lexington, KY 40506-0048
United States

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