For both distressed companies and their directors and officers (“D&Os”), insolvency is often complex and fraught. D&Os owe ongoing fiduciary duties to the company, and must often make difficult decisions that impact the enterprise and its creditors, shareholders, employees and other stakeholders. There are various reasons to serve as a D&O of a distressed company, many that mirror the reasons people first chose to serve. D&Os of distressed companies have a unique opportunity to help an enterprise navigate challenges and to facilitate the best available outcome for stakeholders. Moreover, despite the noteworthy developments described below, D&Os can still take substantial comfort from the fact that major business decisions in Chapter 11 require bankruptcy court approval after public notice and right to object, and that Chapter 11 plans of reorganization often provide D&Os who “see things through” with debtor releases and exculpations, even if third-party releases are not ultimately available.
Those factors have traditionally been viewed as making bankruptcy fairly low risk for D&Os. Several recent developments have, however, shifted the landscape somewhat and altered the risk profile. First, commentators have pointedly criticized so-called “bankruptcy directors” (described below), alleging that they often present incremental conflict issues and are not actually disinterested. Second, courts have recently criticized Chapter 11 D&Os, and demanded that directors take more active and informed roles. Third, courts have recently denied motions for summary judgment and ruled that suits against D&Os, even arising from corporate actions approved by a bankruptcy court, may not be heard by that court. One ruling also raises the spectre of personal liability for D&Os in connection with a company’s external communications. Fourth, there has recently been substantial judicial and legislative scrutiny of third-party releases, long used to provide finality to D&Os who see a case through to conclusion. Finally, it is often important for D&Os to seek legal advice from company or board counsel; recent case law suggests that relatively commonplace practices might waive privilege. D&Os of distressed companies should be aware of these developments and take yet further care in exercising their fiduciary duties.