Professor J. Haskell Murray of the Regent University School of Law, a former law clerk for the Delaware Court of Chancery, has published a paper on an issue about which the Delaware courts have not yet provided clear and unambiguous guidance. An excerpt from an abstract of the professor’s paper, titled: ‘Latchkey Corporations’: Fiduciary Duties in Wholly Owned, Financially Troubled Subsidiaries, follows:

The current state of the law fails to provide clear guidance to directors of wholly owned, financially troubled (“WOFT”) subsidiaries regarding to whom their fiduciary duties run. Directors of solvent wholly owned subsidiaries can act in the best interests of their parent corporation with little fear of liability because the parent corporation is the only party that can sue derivatively on behalf of the subsidiary corporation and is also the subsidiary’s only shareholder. However, when a subsidiary corporation becomes insolvent, or in some jurisdictions merely becomes financially troubled, most courts grant the creditors of the subsidiary corporation standing to sue derivatively on behalf of the subsidiary for breaches of fiduciary duty. This grant of standing to creditors traps directors of WOFT subsidiaries between the proverbial Scylla and Charybdis. If directors of a subsidiary favor their parent corporation, the directors will risk facing a fiduciary duty lawsuit from the creditors. On the other hand, favoring creditor interests could open directors of a subsidiary to fiduciary duty-based lawsuits from the parent corporation or lead to prompt removal of the directors by the parent corporation.