This is the second day that our blog posts will be presented from the annual Tulane Corporate Law Institute. The panel presentation this morning that would be of the most interest to readers is entitled: "M & A of Financially Distressed Companies". Among the issues addressed at this intersection of corporate law and bankruptcy law is the scope of fiduciary duties of the board of directors, and to whom are those duties owed?

There was discussion of J.P. Morgan’s purchase of Bear Stearns as a means for Bear Stearns to avoid bankruptcy and the need to make decisions in a matter of hours–not days or weeks.

One panel member, who is part of the Delaware judiciary, suggested that in most cases the very short, expedited timetable involved in the historic events relating to Bear Stearns and Lehman Bros. is not  typical or common, and that the boards of distressed companies should be more forward-looking in terms of trying to plan for dealing with these issues.

He also indicated that recent  Delaware cases emphasize that the duties of directors do not change simply because the company is failing. The BJR protection is still available even when the company is on the verge of bankruptcy. If the directors think the best way to fulfill their obligations is to liquidate, that may be the fulfillment of their duties depending on the situation. Alternatively, the best decision may be to seek additional capital. If the prerequisites to the presumption of the BJR apply, the Court will defer to the business judgment of the directors. Reference to what has been called "the zone of insolvency" can be a distraction because it has no precise boundaries.

A simple rule for directors still applies: Maximize value of the entity and don’t steal from the entity. As for preferred shareholders, they are limited to contract rights and the board is entitled to prefer the well-being of common shares over preferred shares–to the extent that the contract rights of preferred do not require any benefits superior to common shareholders. See, e.g.,Trados case,  where the fiduciary decided to terminate the entity, without benefit to the common shareholders,  but the preferred shareholders benefit. In those situations, the Court will carefully examine whether the preferred holders are receiving more than what their contract rights entitled them to receive.

In essence, the focus of directors should be to preserve the value of common shareholders. Others like creditors have contractual rights on which they can rely.


An afternoon panel grappled with ethics issues and one of the panel members was Vice Chancellor Travis Laster of the Delaware Court of Chancery who provided important "practice pointers" of great interest to anyone appearing in his Court. A few highlights follow:

Avoid Intemperate Language in Briefs:

  • Do not accuse a lawyer of misleading the Court unless you are prepared to prove it.
  • The word "false" is not a synonym for "incorrect" because the word "false" involves the concept of "scienter" and is His Honor believes it is unprofessional to use that accusation in a brief unless one truly believes that a Rule 11 violation or ethical violation is involved.

Deposition Practice Styles:

  • Civility during a deposition is important. For example, when defending a deposition, if one makes continuous critical comments of the opposing attorney beyond simple objections, or otherwise interferes inappropriately with the deposition, at some point  it will invite a "do over" that will be at the cost of the offender.

Class Action Settlement Issues

  • His Honor did not want to discuss his recent Revlon decision as it is still a pending case, but made a few passing comments. The record in that case was limited but it is noteworthy that it did not announce new law.  The decision cited to Newberg’s Class Actions treatise. Class counsel, it must be remembered, is a fiduciary and all the applicable fiduciary duties apply. As a matter of ethics and professionalism, it is dangerous for class counsel to address the merits of the case mixed in with a discussion of fees to be awarded. That "failure to separate the merits and fee award" will raise fiduciary duty issues with the counsel involved.
  • Factual recitations in an MOU and the proxy statements will be closely examined. The "presumption of causation of the lawsuit and a later benefit" cannot be used to create fictitious chronologies about how the settlement occurred and who contributed to it.