The Board's Duty to Keep Its Options Open
15 Pages Posted: 11 May 2014
Date Written: May 8, 2014
It is widely believed that big chapter 11 cases are now routinely done by way of a quick 363 sale, followed by a not quite as quick liquidation of the residue of the debtor, along with a distribution of the sale proceeds. Indeed, commentators widely bemoan the fact that debtors arrive in chapter 11 with no choice but to do a quick sale, because their lenders won't permit anything else.
In this paper, I argue that the roots of the issue are corporate governance, and not bankruptcy. That is, if the tendency for debtors to show up in chapter 11 with no option but to engage in a quick sale process is a problem, that problem has its roots in non-bankruptcy corporate law.
I then begin the process of explaining how the decision to lock a company into an all-encompassing secured loan, and thus a likely quick 363 sale, should be regulated. Namely, I argue that ultimately this is a question of state law fiduciary duties, and that the foundation for this duty already exists in the Delaware Supreme Court’s oft maligned Omnicare, Inc. v. NCS Healthcare, Inc.
In short, state corporate law imposes a duty on the board to carefully consider any decision that will foreclose a future board’s choices. In times of financial distress, this duty includes an obligation to carefully consider the effects of a particular decision on future restructuring options.
Keywords: financial distress, chapter 11, 363 sales, Omnicare, Delaware
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