19 Jan 2016 Email To ENR Cheifs of Staff - How Could Fiduciary Duty Conflict With The Public and National Interest (Corrected)

From:
Subject:
Date:
To:
Douglas Grandt answerthecall@me.com

How could fiduciary duty conflict with the Public and National Interest [Corrected]
January 19, 2016 at 8:55 AM
Edward Hild (Sen. Murkowski) Edward_Hild@murkowski.senate.gov, David Cleary (Sen. Alexander)
David_Cleary@alexander.senate.gov, Dan Kunsman (Sen. Barrasso) Dan_Kunsman@barrasso.senate.gov,
Joel Brubaker (Sen. Capito) Joel_Brubaker@capito.senate.gov, James Quinn (Sen. Cassidy) James_Quinn@cassidy.senate.gov,
Jason Thielman (Sen. Daines) Jason_Thielman@daines.senate.gov, Chandler Morse (Sen. Flake)
Chandler_Morse@flake.senate.gov, Chris Hansen (Sen. Gardner) Chris_Hansen@gardner.senate.gov,
Ryan Bernstein (Sen. Hoeven) Ryan_Bernstein@hoeven.senate.gov, Boyd Matheson (Sen. Lee) Boyd_Matheson@lee.senate.gov
, Mark Isakowitz (Sen. Portman) Mark_Isakowitz@portman.senate.gov, John Sandy (Sen. Risch) John_Sandy@risch.senate.gov,
Travis Lumpkin (Sen. Cantwell) Travis_Lumpkin@cantwell.senate.gov, Jeff Lomonaco (Sen. Franken)
Jeff_Lomonaco@franken.senate.gov, Joe Britton (Sen. Heinrich) Joe_Britton@heinrich.senate.gov, Betsy Lin (Sen. Hirono)
Betsy_Lin@hirono.senate.gov, Patrick Hayes (Sen. Manchin) Patrick_Hayes@manchin.senate.gov,
Bill Sweeney (Sen. Stabenow) Bill_Sweeney@stabenow.senate.gov, Mindy Myers (Sen. Warren)
Mindy_Myers@warren.senate.gov, Jeff Michels (Sen. Wyden) Jeff_Michels@wyden.senate.gov,
Michaeleen Crowell (Sen. Sanders) Michaeleen_Crowell@sanders.senate.gov, Kay Rand (Sen. King) Kay_Rand@king.senate.gov
, Joe Hack (Sen. Fischer) Joe_Hack@fischer.senate.gov, Derrick Morgan (Sen. Sasse) Derrick_Morgan@sasse.senate.gov,
Karen Billups (Senate ENR Ctee) Karen_Billups@energy.senate.gov, Colin Hayes (Senate ENR Ctee)
Colin_Hayes@energy.senate.gov, Angela Becker-Dippmann (Senate ENR Ctee) Angela_Becker-Dippmann@energy.senate.gov
Cc: Jordan Cox (Sen. Fischer) Jordan_Cox@fischer.senate.gov, Ginger Willson (Sen. Sasse) Ginger_Willson@sasse.senate.gov,
Ali Aafedt (Sen. Hoeven) Alexis_Aafedt@hoeven.senate.gov
Dear Chiefs of Staff of the Senate Energy & Natural Resources Committee (ENR) and the Nebraska Senate Delegation,
On January 15, I emailed Senators Fischer's and Sasses Chiefs of Staff Jordan Cox and Ginger Willson, asking again for their
intervention with ENR Chairman Murkowski:
Please request Senator Murkowski to call for testimony and assurances that CEOs will act in the Public and National
Interest when there is a conflict with their fiduciary duty. As part of an energy policy, ENR should compel them to act in
our best interest.
For your convenience I will restate my rationale for petroleum CEOs testifying before ENR:
I fear that sustained low oil prices will cause production companies to go belly up precipitously, reducing refineries'
feedstock, leaving America with less diesel, gasoline, kerosene, fuel oil, and other liquid fuels. The bottom line as I see
it, is a collapse of petroleum equities, a general downward market panic, and devastating declines in the economic health
of the nation, individual retirement funds, pensions and superannuationsin short, mayhem in America.
In my January 15 email to you, the Chiefs of Staff of the ENR member Senators, I bemoaned the fact that you have not
responded to my dozens of emails (and dozens of letters to the Senators). Yesterday, it occurred to me that perhaps you do not
understand fiduciary duty and why CEOs and Boards of Directors exercising fiduciary duty in the face of insolvency will likely be
in direct conflict with Congress requirement that they act in the Public and National Interest.
Therefore, I direct you to American Bar Association document that hopefully will elucidate the basis for my fears:
INSOLVENCY AND FIDUCIARY DUTIES: ADVISING DIRECTORS AND OFFICERS WHEN THE COMPANY CANNOT PAY ITS
BILLS dated August 6, 2010 [CORRECTION] (Bit.ly/ABA6Aug10)
Sincerely yours,
Doug Grandt
MIUtiCAN BAA A$SOCIATION
Business law Section
Annual Meeting
San Francisco, CA
August 6, 2010
2:30 p.m., PST
INSOLVENCY AND FIDUCIARY DUTIES:

ADVISING DIRECTORS AND OFFICERS
WHEN THE COMPANY CANNOT PAY ITS BILLS
Program Chair/Moderator:
Lewis H. Lazarus, Esq.
Morris James LLP
Program Speakers:
The Honorable Elizabeth S. Stong
United States Bankruptcy Judge, E.D. of New York
Ted S. Waksman, Esq.
Weil, Gotshal & Manges LLP
Kristen K. McGuffey, Esq.
Executive Vice President, General Counsel and Secretary
Simmons Bedding Company
PHOENIXl528510.2
William Creekmuir
Executive Vice President, Chief Financial Officer and Treasurer
Craig D. Hansen, Esq.
Squire, Sanders & Dempsey L.L.P.
PHOENIXJ528510.2
TABLE OF CONTENTS
Page
I.
DIRECTORS AND OFFICERS FIDUCIARY DUTIES ....................................... 1
II.
A.
The Duty of Loyalty ...................................................................... 1
B.
The Duty of Care ......................................................................... 2
C.
The Business Judgment Rule ........................................................ 2
HOW DO THESE DUTIES CHANGE WHEN A CORPORATION

APPROACHES INSOLVENCY? ................................................................... 3
III.
IV.
A.
Introduction ................................................................................ 3
B.
Zone or Vicinity of Insolvency ....................................................... 3
C.
To Whom Are Fiduciary Duties Owed? .......................................... 4
D.
A Word on "Deepening Insolvency" ............................................... 4
SPECIFIC CHAPTER 11 CONSiDERATIONS ................................................ 5

A.
Duties During Chapter 11 Proceedings ......................................... 5
B.
Revlon Duties and Their Application To A Chapter 11 ................... 6
COMMON CHAPTER 11 TRANSACTION STRUCTURES THAT

IMPLICATE FIDUCIARY DUTIES ................................................................ 7
V.
VI.
A.
Introduction ................................................................................ 7
B.
The 363 Sale ................................................................................ 7
C.
The StandAlone Plan .................................................................... 8
D.
The Plan Sponsor ......................................................................... 9
RESTRUCTURING TRANSACTIONS INVOLVING RELATED PARTIES ............. 9

A.
Introduction ................................................................................ 9
B.
The Use Of Special Committees In A Chapter 11 ......................... 10
SOME CAUTIONARY WORDS REGARDING D&O INSURANCE .................... 12
PHOENIXl5285 10.2
TABLE OF CONTENTS
(continued)
Page
Exhibits
Bankruptcy Bulletin - Delaware Supreme Court Clarifies Fiduciary
Duties When A Corporation Is Insolvent or In the Zone of Insolvency
- Weil, Gotshal & Manges LLP
North American Catholic Educational Programming Foundation,

Inc. v. Cheewa//a, 930 A.2d 92 (Del. 2007)
Sample
Memorandum
to
Board
of
Directors
of
Distressed
Companies Regarding Scope of Fiduciary Duties - Squire, Sanders &

Dempsey L.L.P.
4
Fiduciary Duties for Directors of Troubled Companies - Weil,

Gotshal & Manges LLP
Rev/on Duties Under Delaware Law - Morris James LLP
PHOENIXJS285I 0.2
11
I.
DIRECTORS AND OFFICERS FIDUCIARY DUTIES.

Generally, directors and officers fiduciary duties comprise the duty of
loyalty and the duty of care.
Under Delaware law, corporate officers and
directors have identical fiduciary duties.

695, 708-09 (Del. 2009).
See Cant/er v. Stephens, 965 A.2d
So long as the directors and officers comply with
these duties, they are entitled to the protections of the business judgment rule.
When the business judgment rule applies, a court will not typically substitute its
own view for those of directors and officers or second-guess the outcome of
business decisions by holding a director or officer personally liable for a
mistake in judgment. Each of these duties is discussed more fully below.
A.
The Duty of Loyalty

1.
In dealings with and on behalf of the corporation, directors
owe a fiduciary duty of loyalty to the corporation, which demands that there be
no conflict between the corporation's interest and the director's interest.
Directors must avoid self-dealing, observe confidentiality

obligations,
and
not abuse corporate
opportunities for
personal gain.
A disqualifying interest can exist because a director is

"dominated" or "controlled" by a party interested in a
corporate transaction.
Challenges to conflicts of interests can be cured by a

showing that an action was approved by a majority of
disinterested directors who were informed of the conflict.
2.
The duty of loyalty includes the obligation to act in good
faith with "a true faithfulness and devotion to the interests of the corporation
and its shareholders."
A failure to act in good faith could be shown where a director

intentionally acts with a purpose other than that of advancing
the best interests of the corporation, acts with the intent to
PHOENIXl528510.2
violate applicable law, or intentionally fails to act in the face

of a known duty to act.
A director who deliberately avoids acting in the best interests

of the corporation cannot evade liability by showing that
he/she technically met the requirements of their fiduciary
duties.
3.
The duty of loyalty also includes the obligation to disclose
any conflicts of interest with respect to any corporate matter being decided.
In matters before the board, a director must inform fellow

directors of any conflict of interest.
When seeking shareholder action on a matter involving a

conflict of interest, an interested director must disclose to all
shareholders such conflict of interest.
B.
The Duty of Care

Directors are required to exercise a requisite degree of care and
prudence in the process of making decisions and in carrying out directorial

responsibilities.
Directors must inform themselves of all material information

reasonably available to them before making a business
decision.
The General Corporation Law of Delaware allows directors to

rely on information provided by the corporation's officers,
employees, and other advisors, as long as the directors
reasonably believe the information provided is within the
scope of the provider's professional or expert competence,
and the person so relied upon has been selected with care.
The duty of care still requires that directors evaluate advice
and information critically and investigate further if there are
PHOENIXl5285 10.2
facts or circumstances
signaling a need for additional
information.
The Business Judgment Rule

Under the business judgment rule, there is "a presumption that in
making a business decision the director of a corporation acted on an informed

basis, in good faith and in the honest belief that the action taken was in the
best interests of the company."
Standard of judicial review used by courts to determine when

close scrutiny of a transaction is warranted. When directors
have fulfilled their duties of care and loyalty in good faith,
courts presume, under the business judgment rule, that their
decisions are valid.
Protects directors' ability to exercise their discretion when

making decisions on behalf of the corporation without fear of
a court
questioning
the
wisdom
of their
decision
in
hindsight.
A plaintiff can overcome the presumption of the business

judgment rule by showing that a director has failed to act
with due care or loyalty, or lacked good faith in carrying out
these duties, in which case, the court will scrutinize the
challenged transaction substantively.
II.
HOW DO THESE DUTIES CHANGE WHEN A CORPORATION APPROACHES

INSOLVENCY?
A.
Introduction
What does it mean to be in the "zone" or "vicinity" of insolvency?
To whom are directors' fiduciary duties owed when a corporation is

in the zone of insolvency or is insolvent?
PHOENIXl5285 10.2
Do creditors have claims for breaches of fiduciary duties against

directors of a corporation that is in the zone of insolvency or is
insolvent?
B.
Zone or Vicinity of Insolvency

1.
There is no exact definition of the "zone" or "vicinity" of
insolvency, but generally, a corporation is considered in the "zone" or "vicinity"

of insolvency when it is near or approaches the point where:
"the sum of such entity's debts is greater than all of such

entity's property, with no reasonable prospect that the
business can be successfully continued" or
The corporation is "unable to pay its debts as they fall due in

the usual course of business."
2.
This rather subjective concept can be difficult to apply in
practice, but it may be telling that the question is being asked.
The board
should act diligently in determining whether the corporation is in the "zone" or

"vicinity" of insolvency and may consider, among other factors, advice of its
financial advisors in reaching its conclusion.
3.
A company may be operating in the zone of insolvency
when it is not yet technically insolvent under either the "bankruptcy test" or
the "equitable insolvency test," but nevertheless is experiencing financial
difficulties.
4.
As the risk that creditors will not be paid increases, the
likelihood that a company is in the zone of insolvency increases.
To Whom Are Fiduciary Duties Owed?

In the case of North American Catholic Educational Programming
Foundation, Inc. v. Cheewa/la, 930 A.2d 92 (Del. 2007), the Delaware Supreme
Court clarified
the
law on
fiduciary duties for directors
corporations when it held as follows:
PHOENIXl528510.2
of distressed
Solvent Corporations: directors owe fiduciary duties to the

corporation and its shareholders.
Zone of Insolvency: directors continue to owe fiduciary duties

to the corporation and its shareholders, and not to creditors,
when a corporation becomes distressed or is at risk of
insolvency.
Insolvency: when a corporation is insolvent, directors owe

fiduciary duties to the corporation as an enterprise, and the
creditors are permitted to bring derivative suits on behalf of
the corporation, but not direct causes of action.
D.
A Word on "Deepening Insolvency"

Historically, a theory that has been advanced in a number of cases
against, among others, officers and directors, is a claim for damages based on
the concept of "deepening insolvency." The theory of liability for damages for
deepening insolvency was never well-defined nor was it universally embraced
by all courts, and there are few written judicial decisions concerning the topic.
Accordingly, creativity in the use of the theory abounds.
Simply stated, the
concept of damages for deepening insolvency is that there are times when a
defendant's conduct, either fraudulently or negligently, prolongs the life a
corporation, thereby increasing the corporation's debt and exposure to
creditors.
Under the "deepening insolvency" theory, those with fiduciary
obligations may be liable for damages suffered by creditors for deepening the
insolvency of a corporation.
In the
past, there were
arguably three
classes
defendants against whom this legal theory has been directed.
of possible
Officers and
directors may be held personally liable concerning actions taken that could be
construed to prolong the life of a corporation to the detriment of creditors,
thereby deepening the insolvency of the corporation. Essentially, the theory of
deepening insolvency as against officers and directors has been used as a way
to assert liability for mismanagement using a hindsight test. The theory has
also been used against certain lenders as well as the company's professionals.
PHOENIXl5285 10.2
The crux of the deepening insolvency issue for the officers and
directors of a corporation was whether actions that are being taken, or not
taken, essentially created a worsening situation for the corporation's creditors.
Recently, however, the deepening insolvency theory of liability has been
rejected by courts, including the Delaware courts. See, e.g., Trenwick America
Litigation Trust v. Ernst & Young L.L.P., 906 A.2d 168, 205 (Del. Ch. 2006)
(rejecting independent cause of action for deepening insolvency); Fehribach v.
Ernst & Young L.L.P., 493 F.3d 905, 909 (7th Cir. 2007) (applying citing
Trenwick for the proposition that the deepening insolvency theory "makes no
sense"); see generally Cheewalla, 930 A.2d 92.
Accordingly, officers and
directors owe a Delaware corporation the general duties of care and loyalty. In
this regard, if a board acts with due diligence and in good faith, but the chosen
strategy results in a deepening insolvency, the "directors are protected by the
business judgment rule. To conclude otherwise would fundamentally transform
Delaware law." Trenwick, 906 A.2d at 205.
The deepening insolvency theory of liability, again, was never a
clearly defined cause of action, and the cause of action is no longer viable with
respect to Delaware corporations.
Notwithstanding, it is something that the
Board as well as the officers of the Company should be aware of.

III.
SPECIFIC CHAPTER 11 CONSIDERATIONS
A.
Duties During Chapter 11 Proceedings.

In the case of Trenwick Am. Litigation Trust v. Ernst & Young,
L.L.P., 906 A.2d 168 (Del. Ch. 2006), aff'd Trenwick Am. Litigation Trust v.
Billet, 931
A.2d 438 (Del. 2007), the Delaware courts clarified that the
operation of the business judgment rule does not change depending on the
level of solvency of a corporation.
The duties of a corporate chapter 11 debtor-in-possession or
"DIP", are essentially two fold:
First, those prescribed by state corporate law
(i.e., the duty of care and duty of loyalty described above); and second, those
duties imposed on a DIP under federal bankruptcy law. If there is a conflict, the
duties under federal bankruptcy law will prevail.
PHOENIXl528510.2
A DIP owes a fiduciary duty to all interested parties, creditors and

shareholders alike. Although there are two sources of fiduciary duties for a DIP,
the federal bankruptcy law duties are, for all practical purposes, derived from
the state law duties of care and loyalty. Specifically, under the bankruptcy laws,
a DIP is held to a standard of care, skill and diligence that an ordinary person
will exercise under similar circumstances. See In re Rigden, 795 F.2d 727,730
(9th Cir. 1986); In re Happy Time Fashions, Inc., 7 B.R. 665, 670 (Bankr.
S.D.N.Y. 1980).
Simply stated, the DIP has a duty of loyalty to "maximize the value
of the estate", refrain from self-dealing, and treat all parties fairly in addressing
and resolving the conflicting tensions that necessarily arise between the various
stakeholders and
parties in interest in a chapter 11
proceeding.
See
Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 353 (1985); In
re Integrated Resources, Inc., 147 B.R. 650, 658 (S.D.N .Y. 1992).
From a
practical perspective, unlike the decision-making process outside of a chapter

11 proceeding, many of the decisions of officers and directors made in the
context of a chapter 11 are subject to disclosure to, and approval by, the
bankruptcy court. Under the bankruptcy laws, transactions that fall outside of
the debtor's ordinary course of business require prior bankruptcy court
approval. The approval by a bankruptcy court of a particular transaction (e.g.,
sale, selection of a plan sponsor, stalking horse bidder, to name a few) provides
an additional layer of protection for a director and officer of a DIP.
Finally, it is common practice to include, as part of a chapter 11
plan of reorganization (the "Plan") and related confirmation order and findings
of fact and conclusions of law, that the DIP's officers and directors acted in
good faith and fully discharged their fiduciary duties in the context of the
restructuring - related decisions.
These findings and conclusions are typically
supported by an injunction contained in the Plan prohibiting creditors and other

parties in interest from initiating actions against the directors and officers,
unless their conduct rose to the level of gross negligence or willful misconduct.
PHOENIXl528510.2
B.
,
Revlon Duties and Their Application To A Chapter 11.
In a non-bankruptcy context, courts have held that when it
becomes obvious that the sale of a company (or presumably its assets) is
inevitable, a heightened level of scrutiny is applied to evaluate the decision of a
target's Board granting prohibitive buyer protection devices to a potential
purchaser which will chill competitive bidding.
In other words, once the
company is in play, the Board has an affirmative duty to get the highest price no "playing favorites".
In a non-bankruptcy context, the seminal case in
defining the heightened scrutiny of buyer protections which would have the
impact of chilling bidding is Revlon v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986). In essence, the legal duty of a board of directors once a
decision has been made to sell the company or its assets is to maximize the
value and not to grant such advantage to one or more potential bidders that
has the effect of stacking the deck and chilling the bidding.
As stated above, a Chapter 11 DIP owes a fiduciary duty to all of
the creditors and other interest holders of its bankruptcy estate to maximize
value. See In re Bidermann Industr. U.S.A., Inc., 203 B.R. 547, 551 (Bankr. S.D.
N.Y. 1997). The filing of a bankruptcy proceeding has the practical effect of
putting the company in play whether the company likes it or not.
Since the
ultimate fiduciary duty of an insolvent company is to maximize the return to the

various constituencies, the company needs to understand that a reorganization
plan that maximizes value, even if it is a plan that is not necessarily proposed
by the company, needs to be seriously evaluated much like a tender offer
outside of a bankruptcy proceeding. As such, there is a duty to shop and that
involves keeping an open mind to proposals even if they are not generated by
the company.
All restrictions on the debtor's ability to market its assets will be subject
to the strictest scrutiny provided by a Bankruptcy Court. See TCI2 Holdings,
LLe, 428 B.R. 117, 144 (Bankr. N.J. 2010),' see e.g., Bidermann Indust., U.S.A.,
Inc., 203 B.R. at 551 (holding "window-shop" clause improper); In re Big Rivers
Iec. Co., 233 B.R. 726, 734-735 (W.D. Ky. 1998) (voiding "no-shop clause"
because it forced debtor to violate its fiduciary duty). Compare Revlon, 506
A.2d at 184 (finding improper lock-up and no-shop agreement ending
PHOENIXI528510.2
negotiations with other known bidders) and Paramount Communications, Inc. v.

QVC Network, Inc., 637 A.2d 34,49 (Del. 1994) (holding no-shop provision
impermissibly interfered with directors' ability to negotiate with other known
bidders).
The Court will analyze the transaction under provisions of the Bankruptcy
Code, such as section 363 (discussed below) and section 1129 (Confirmation of
a Plan), and will look to how the transaction was tailored when determining
whether to impose an enhanced level of scrutiny. See In re PWS Holding Corp.,
228 F.3d 224, 247 (3d Cir. 2000). The sale or the confirmability of the debtor's
plan may be defeated if a breach of fiduciary duty by officers or directors is
demonstrated. See e.g., In re Coram Healthcare Corp., 271 B.R. 228 (Bankr. D.
Del. 2001) (debtor's plan of reorganization rejected on good faith grounds
where the debtor's chief executive officer and president had been receiving
almost $1 million per year under employment agreements with a large creditor
of the debtor without debtor's knowledge).
IV.
COMMON CHAPTER 11 TRANSACTION STRUCTURES THAT IMPLICATE

FIDUCIARY DUTIES.
A.
Introduction.
While each chapter 11 is unique, there are common transaction
structures that are used as a means to maximize the recovery to the various
constituencies.
Each of these common transaction structures implicates the
fiduciary duties of the DIP's directors and officers.
Most of these transaction
structures are implemented as part of the plan but, as described immediately

below, a sale of all or a substantial portion of a DIP's assets may occur pursuant
to a proceeding under 11 U.S.c. 363 of the Bankruptcy Code (a "363 Sale").
B.
The 363 Sale.

Under the bankruptcy laws, a DIP may sell assets free and clear of
liens, claims and encumbrances outside the ordinary course of business,

provided that prior bankruptcy court approval is obtained. Typically, in a 363
Sale, the DIP will formulate a sale process by which prospective purchasers may
PHOENIXl5285I 0.2
obtain material non-public information necessary to submit a bid, the process

by which bids must be submitted, the evaluation of the bids and the ultimate
auction that may occur to select the highest or best bid. The DIP's directors
and officers, together with their restructuring professionals, must design a sale
process that does not create unnecessary barriers to prospective purchasers or
otherwise "chill" competitive bidding.
While it is beyond the scope of these
materials, the implementation, as part of the sale process that is developed, of

typical buyer "protective devices", such as break-up fees, topping fees, noshop, window-shop and go-shop provisions will be scrutinized by not only the
bankruptcy court but by other creditors and parties in interest, including
prospective bidders.
In the context of formulating and implementing a 363
Sale, the DIP's directors and officers need to be cognizant of, and particularly
sensitive to, the following:
Does the prospective 363 Sale potentially involve a related

party, including participation of controlling shareholders,
interested directors or executive management of the DIP with
one or more potential bidders? If so, it may be necessary to
form a special committee of the board of directors to
conduct the sale process (see discussion below regarding
"Use of Special Committees").
Is the 363 Sale the most likely vehicle to maximize the value
of the assets and the recoveries to the various constituencies
when compared to other potential alternative restructuring
scenarios (i.e., a "StandAlone Plan" or a "Plan Sponsor"
structu re)?
Are there substantial or good business reasons for the 363

Sale?
PHOENIXI528510.2
Are the bid procedures to be implemented appropriate to

ensure that there are no unnecessary barriers to a
competitive bidding process?
10
Are there factors, beyond the mere purchase price, that

should be evaluated in determining the highest or best offer?
Such factors may include, for example, antitrust or other
regulatory
concerns,
financing
and
due
diligence
contingencies and potential significant delays in closing the

sale transaction.
Are the DIP's restructuring professionals (lawyers, financial

advisors and investment bankers) actively involved not only
in the formulation of the sale process but also the evaluation
and negotiation of bids?
There are considerable protections afforded to the directors and

officers of a DIP in connection with a 363 Sale. As mentioned above, most 363
Sale transactions involve the sale of assets outside the ordinary course of
business and require bankruptcy court approval.
Hence, the sale process
developed and implemented as well as the selection of the highest or best bid
is ultimately subject to approval by the bankruptcy court following extensive
notice and disclosure to creditors and parties in interest and, in most
circumstances, an auction.
The StandAlone Plan.

The proper discharge of the directors and officers fiduciary duties
requires that numerous potential restructuring alternatives be evaluated to

determine the particular vehicle that maximizes the value of the company for
the benefit of the various stakeholders.
Typically, a 363 Sale may render a
recovery to stakeholders that is significantly less than the long term value
associated with a "Standalone Plan", and the associated debt and equity
securities that may be issued pursuant to such a plan. Under a Standalone Plan,
the debtor will likely restructure its existing debt and equity securities without
the benefit of additional third party capital (except for normal exit financing for
working capital purposes).
Depending upon valuation considerations,
particular stakeholders (particularly those parties with a "loan to own" objective)
may view a new debt or equity security issued by the reorganized debtor as
creating greater long term value than the cash distribution that may be received
PHOENIXI528510.2
11
as part of a 363 Sale.
In general, in determining whether to pursue a
Standalone Plan, the directors should consider mUltiple factors, including the
following:
An assessment of the potential recoveries to stakeholders

under a liquidation, 363 Sale and a Plan Sponsor (discussed
below) scenario.
The
views
of stakeholders
regarding
the
restructuring
scenario to be selected.
The long-term feasibility of the DIP reorganizing on a

"standalone" basis.
The opinions of the DIP's restructuring professionals of the

Standalone Plan from a financial and implementation point of
view.
D.
The Plan Sponsor.

Typically, a DIP may determine that its ability to reorganize and
maximize recoveries to all stakeholders is greatly enhanced through the active

participation in the Plan by a third party investor or "Plan Sponsor" who is
willing to provide fresh capital into the DIP. Again, like a 363 Sale, the directors
and officers of the DIP should develop and implement a competitive process to
select a particular Plan Sponsor. The process to select the Plan Sponsor may
resemble the auction process discussed above to select the highest or best
offer in connection with a 363 Sale.
V.
RESTRUCTURING TRANSACTIONS INVOLVING RELATED PARTIES.
A.
Introduction.
Many restructuring transactions involve the participation of related
parties to the DIP. These types of transactions are subject to careful scrutiny by
bankruptcy courts. It is worth noting that these types of transactions not only
involve directors of distressed companies who may have a personal interest in
the outcome of the restructuring because of ownership of existing debt or
PHOENIXJ528510.2
12
equity securities, but also executive management that may be critically

important to a prospective purchaser of the assets or to a Plan Sponsor.
The United States Supreme Court, in Bank of America National
Trust and Savings Assoc. v. 203 N. LaSalle Street Partnership, 526 U.S. 434
(1999), specifically addressed the parameters governing the ability of existing
equity to "reacquire" the equity in the reorganized debtor where creditors were
not being paid in full, or did not otherwise consent. Specifically, in 203 North
LaSalle, the Supreme Court held that a plan was unconfirmable unless it
provided for a specific mechanism to permit the solicitation and negotiation of
"competing" bids for the equity in the reorganized debtor, or otherwise allow
the "market" to test whether the holders of old equity were paying the highest
value for the new equity.
In responding to the implication of 203 North LaSalle, the directors
of the DIP may want to consider the following:
If existing equity is represented on the board of

directors,
the
formation
of a Special
Committee
(described below) may very well be warranted.
Develop a process to ensure that the reinvestment

opportunity is sufficiently exposed to the market to
ensure that the highest and best price is obtained.
While the Supreme Court gives little guidance on the
mechanism to ensure that the highest or best price is
obtained, directors of DIPs have either: (i) formulated
processes by which third party investors could submit
competing bids for the equity in the reorganized
debtor; or (ij) agreed to terminate the exclusive period
to file a plan so that competing plans could be filed.
B.
The Use Of Special Committees In A Chapter II.
In circumstances where the DIP may be pursuing a restructuring or

sale transaction involving a related party, DIPs are increasingly turning to the
formation of a special committee of the board of directors (the "Special
PHOENIXl528510.2
13
Committee") comprised of independent and disinterested directors to evaluate

and consider such related-party transactions.
While there is no absolute
requirement under Delaware law or bankruptcy law that the DIP form a Special
Committee in these circumstances, the absence of a Special Committee (or at
least a group of the
existing
board
who are
both
disinterested
and
independent) to evaluate sale and restructuring transactions involving a related

party may evidence the transactions fundamental unfairness.
Bankruptcy courts, creditors and other stakeholders of the DIP,
together with the Office of the United States Trustee, are particularly attuned to
related-party transactions. Hence, the DIP should consider the formation of the
Special Committee comprising independent and disinterested directors that are
fully-informed, well-represented and active in the negotiation process to select
a particular restructuring transaction involving a related party.
A director is interested where the director may receive a material
benefit as a result of the potential restructuring transaction. Directors may be
interested even though they do not receive a direct benefit that relates to the
restructuring transaction.
For example, a director may be interested if the
benefit received by the contemplated restructuring transaction provides further

business or other deals with the related party.
In addition to satisfying the disinterested requirement, the director
should also be independent. In this regard, courts often look to whether the
director is controlled by, or beholden to, another person or entity, or whether
outside influences affect the proper exercise of the director's business
judgment.
In
forming
Special
Committee
to
evaluate
restructuring
alternatives (i.e., 363 Sale, StandAlone Plan, Plan Sponsor, etc.), certain other
important considerations should be taken into account:
The Special Committee should be informed as to the process

(i.e., auction process, buyer protective devices, etc.) and all
of the material terms of the various proposals.
PHOENIXl528510.2
14
The Special Committee should be active in the negotiation

process
culminating
in
the
selection
of
particular
restructuring alternative.
The Special Committee should have real bargaining power,

including the authority to approve or disapprove a particular
restructuring
transaction
involving
related
party,
as
opposed to simply making a recommendation to the full

board regarding a transaction.
The Special Committee should have access to competent and

independent legal and financial advisors as well as to senior
management. It is not uncommon for the DIP's restructuring
counsel to advise the Special Committee under circumstances
where
such
counsel
is
independent,
although
it
is
increasingly common for the Special Committee in the

context of a chapter 11 to employ separate counsel.
Typically, the DIP's senior management is critical to a particular
potential bidder or bidders.
While prospective bidders (and the Special
Committee itself) must have access to senior or executive management, the

Special Committee should determine senior management's involvement in the
actual bidding process and the selection of the ultimate transaction to be
implemented as part of the chapter 11 to avoid perceived or actual conflicts of
interest.
VI.
SOME CAUTIONARY WORDS REGARDING D&O INSURANCE.

A Chapter 11 may have wide-ranging implications for the debtor's D&O
policies and the coverages available under them. Some bankruptcy courts have
held that the D&O policy is actually an asset of the bankruptcy estate and
should be available to pay the claims of creditors against the debtor.
As an
asset of the bankruptcy estate, some courts have held that the directors and
officers should not be able to deplete the policy by having access during the
chapter 11 for the advance of defense costs. As a result of these lines of cases,
PHOENIXJ5285 10.2
15
may insurance carriers require prior bankruptcy court approval for the advance
of defense costs.
Directors and officers of companies in financial distress should review the
terms of the D&O policy with competent legal advisors to assess the availability
of the policies in the context of a formal Chapter 11.
PHOENIXJ528510.2
16
Exhibit 1
Bankruptcy Bulletin - Delaware Supreme Court Clarifies Fiduciary Duties
When A Corporation Is Insolvent or In the Zone of Insolvency
Exhibit 2
North American Catholic Educational Programming Foundation, Inc. v.

Cheewalla, 930 A.2d 92 (Del. 2007)
Exhibit 3
Sample Memorandum to Board of Directors of Distressed Companies
Regarding Scope of Fiduciary Duties
Exhibit 4
Fiduciary Duties for Directors of Troubled Companies
Exhibit 5
Revlon Duties under Delaware Law

Morris James LLP
PHOENIXl5285I 0.2
EXHIBIT 1
Bankruptcy" Bulletin
June 2007 '
Delaware Supreme Court Clarifies Fiduciary Duties When a Corporation

Is Insolvent or in the Zone of Insolvency
The Delaware Supreme Court recently

considered whether, under Delaware
law, a creditor of a corporation in the
zone of insolvency or an insolvent
corporation can bring a direct action
Whether and to what extent a

creditor of an insolvent corporation or a corporation in the
zone of insolvency may bring
a direct claim for a breach of

a fiduciary duty was unclear
prior to the instant case.
against the corporation's directors
for a breach of fiduciary duty. The
court, in North American Catholic
Educational Programming Foundation,
lnc. v. Gheewalla, held that creditors
of a corporation that is insolvent, or
in the zone of insolvency, have no
right to assert direct claims against
corporate directors for breach of
Jiduciary duty. The decision resolves
uncertainty created by previous
opinions that discussed but did not
rule on the fiduciary duties owed to
creditors by directors of corporations
in the zone of insolvency.
Directors' Fiduciary Duties

Directors of solvent corporations owe
fiduciary duties, such as the duty
of care and the duty of loyalty, to
shareholders, but not to creditors.
The duty of care generally requires
directors to exercise that degree
of care that an ordinarily prudent
person would exercise under the
same or similar circumstances.
The duty of loyalty, alternatively,
prohibits self-dealing and the usur-
pation of corporate opportunities. In

evaluating these duties, courts have
adhered to the business judgment
rule, which is a presumption that
directors who made a business
decision acted on an informed basis,
in good faith and in the honest belief
that the action taken was in the best
interests of the solvent corporation.
Creditors of an insolvent corporation
may bring derivative claims against
directors on behalf of the corporation
for breaches of fiduciary duties.
Whether and to what extent a creditor
of an insolvent corporation or a
corporation in the zone of insolvency
may bring a direct claim for a breach
of a fiduciary duty was unclear prior
to the instant case. Previous case law
indicated that directors of a corporation that is insolvent or in the zone
of insolvency owe duties to the firm's
creditors since those creditors may
own the firm's residual value.
While the Delaware Supreme Court
has never addressed directors' fiduciary duties when a corporation is in
the zone of insolvency, other courts
in Delaware have addressed the issue.
In Credit Lyonnais Bank Nederland,
N . V v. Pathe Communications Corp.,
the seminal case regarding the duties
of a board of directors in the zone of
insolvency, the Delaware Court of
Chancery found that "where a corporation is operating in the vicinity
of insolvency, a board of directors is
not merely the agent of the residue
risk-bearers, but owes its duty to the
corporate enterprise."
The Delaware Court of Chancery stated
that directors have "an obligation
to the community of interest that
sustain[s) the corporation, to exercise

judgment in an informed, good faith
effort to maximize the corporation's
long-term wealth creating capacity."
This case has been cited by courts and
commentators for the proposition
that a director's fiduciary duty, while
in the zone of inSOlvency, reqUires the
director to take creditors' interests into
account along with the interests of all
constituencies of the corporation.
In Production Resources Group, L.L.C. v.
NCT Group, Inc., the Delaware Court
of Chancery, in dicta, explained that
the Credit Lyonllais decision did not
create a new body of creditors' rights
law exposing directors to a new set of
fiduciary duties to creditors when the
company is in the zone of insolvency.
Rather, the Credit Lyonnais decision
was meant to highlight the fact that
directors have discretion to temper
the risks they take on behalf of the
equity holders when the company is
in the zone of insolvency. The court
in Production ResOllrces stated that
under Credit Lyonnais, directors are
protected by the business judgment
rule, if they, in good faith, pursued
a less risky strategy because of fear
that a more risky one might render a
company unable to meet its obligations. Creditors have other sources
of protection such as the ability
to bargain for liens on assets and
negotiated covenants in agreements.
Fraudulent conveyance laws and
prinCiples of implied covenants of
good faith and fair dealing also serve
to protect creditors. The court in
Production Resources concluded that
the business judgment rule remains
significant in the zone of insolvency
and provides directors with the
Wei!. Gotshal & Manges
LlP
Bankrupt:cy Bulletin
June 2007
- --------
ability to make a range of good faith,

prudent judgments about the risks
they should undertake on behalf of
troubled corporations.
Factual Background
In North American Catholic, the
plaintiff, North American Catholic
Educational Programming Foundation, Inc. ("NACEPF brought
direct (not derivative) claims against
directors of Clearwire Holdings, Inc.
("Clearwire") for breaches of fiduciary
duties while Clearwire was insolvent
or in the zone of inSOlvency. NACf.PF
and Clearwire entered into an
agreement whereby NACf.PF would
sell certain radio wave spectrum
licenses to Clearwire. Subsequently,
the market for wireless spectrum
collapsed, and Clearwire attempted
to end its obligations to NACEPF,
among others and, effectively, went
out of business.
U
),
NACEPF alleged that Clearwire was

either insolvent or in the zone of
insolvency at all relevant times
and the defendant directors of the
Clearwire board owed fiduciary
duties to NACEPF as a creditor of
Clearwire. NACEPF further alleged
that the directors failed to exercise
their fiduciary duties on behalf of
NACf.PF by failing to preserve Clearwire's assets for the benefit of its
creditors and for continuing to hold
NACEPF's licences when Clearwire
was not going to use them.
The Delaware Supreme Court
affirmed the decision of the Court
of Chancery, which dismissed the
case. The Court of Chancery held
that creditors have no direct claim
against a corporation in the zone
of insolvency and concluded that,
in this case, NACEPF's complaint
failed to state a cause of action for a
direct claim against a director of an
insolvent corporation.
The Delaware Supreme Court's

Decision
Corporations in the Zone of Insolvency
NACEPF argued that the court should

recognize a creditor's right to bring
a direct claim against dirc(.tors for
breaches of fiduciary duties. The
court found that the need to provide
directors with guidance when carrying out their duties compels the
conclusion that creditors of a corporation in the zone of insolvency may
not bring a direct claim for breach
of a fiduciary duty. The court noted
that directors of corporations in the
zone of insolvency "must continue to
discharge their fiduciary duties to the
corporation and its shareholders by
exercising their business judgment in
the best interests of the corporation for
the benefit of its shareholder owners."
Insolvent Corporations
The Court of Chancery had determined that NACf.PF's complaint failed

to satisfy pleading reqUirements and,
thus, did not state a direct creditor
claim, even assuming a direct claim for
breach of fIduciary duty to a creditor
were legally cognizable in the context
of an insolvent corporation. The
Delaware Supreme court held "that
individual creditors of an illsolvent
corporation have flO right to assert
direct claims for breach of fiduciary
duty against corporate directors." The
court explained that recognizing a
new right for creditors to bring direct
fiduciary daims against direttors of
insolvent corporations would create a
conflict between the directors' duty to
maximizc value for the benefit of all
interested parties and a direct fiduciary duty to individual creditors. The
court further stated that directors of
insolvent corporations should be able
to participate in "good faith negotiations with individual creditors for the
benefit of the corporation." While the
court noted that NACEPF did not bring
a derivative claim against the directors
and only asserted a direct claim against

the directors, the court advised creditors that they may bring derivative
claims to protcct their interests.
Conclusion
The North American Catholic decision
has provided Significant guidance for
directors faced with difficult decisions
for stmggling corporations: First, the
holding clarifies that the fiduciary
duties of directors and officcrs of
insolvent corporations pertain to the
corporation itself
not creditors. Sccond, by removing the
possibili ty of direct suits by creditors
against directors, the decision removes
significant negotiating leverage from
creditors. Creditors still have a remedy
in derivative suits, but they must clear
certain procedural hurdles to bring
them. When these suits are successful,
recoveries enure to the benefit of the
corporation. Third, the holding implies
that the tmst fund doctrine, by which
directors of insolvent corporations
were required to manage corporate
assets as though they were held in trust
for creditors, cannot support the creation of special fiduciary duties owed
to creditors by directors of insolvent
corporations under Delaware law.
By mling that directors of financially
struggling corporations owe fiduciary
duties to shareholders and the corporation itself, the Delaware Supreme
Court has made it much easier for
directors to exercise their business
judgment, and be protected by the
business judgment mle, without
exposure to direct liability suits
brought by disgruntled creditors.
N. Am, Catholic Educ.
Found., Inc. v.
Ghel'Wullu, No. 52\, 2006, 2oo7 WL 1453705
(Del. May 18, 2oo7).
Crt'llit Lyollnais Bank Nl!dnland, N. V. v. Pallre
Commc'l/S Corp., No. Civ. A. 12150, 1991 WL

277613 (Del. Ch. Dec. 30, 1991).
('rod. ReI. Group, LL.C. v. NeT Group, Inc., 863
A.2d 772 (Del. Ch. 2004).
Wei!, Gotshal & Manges
LLI'
EXHIBIT 2
IN THE SUPREME COURT OF THE STATE OF DELAWARE

NORTH AMERICAN CATHOLIC
EDUCATIONAL PROGRAMMING
FOUNDATION, INC.,
No. 521, 2006
Plaintiff Below,
Court BelowCourt of Chancery
Appellant,
of the State of Delaware,
in and for New Castle County
v.
C.A. No. 1456-N
ROB GHEEWALLA, GERRY
CARDINALE and JACK DALY,
Defendants Below,
Appellees.
Submitted: February 12, 2007

Decided: May 18, 2007
Before STEELE, Chief Justice, HOLLAND, BERGER, RIDGELY,
Justices, and ABLEMAN, Judge.1
Upon appeal from the Court of Chancery. AFFIRMED.
Edward M. McNally, Esquire (argued) and Raj Srivatsan, Esquire,
Morris, James, Hitchens & Williams, Wilmington, Delaware, for appellant.
Samuel A. Nolen, Esquire, Richards, Layton & Finger, Wilmington,
Delaware, for appellees.
HOLLAND, Justice:
Sitting by designation pursuant to Del. Const. art. IV, 12 and Supr. Ct. R. 2 and 4.
This is the appeal of the plaintiff-appellant, North American Catholic

Educational Programming Foundation, Inc. (NACEPF) from a final
judgment of the Court of Chancery that dismissed NACEPFs Complaint for
failure to state a claim.2
NACEPF holds certain radio wave spectrum
licenses regulated by the Federal Communications Commission (FCC). In

March 2001, NACEPF, together with other similar spectrum license-holders,
entered into the Master Use and Royalty Agreement (the Master
Agreement) with Clearwire Holdings, Inc. (Clearwire), a Delaware
corporation. Under the Master Agreement, Clearwire could obtain rights to
those licenses as then-existing leases expired and the then-current lessees
failed to exercise rights of first refusal.
The defendant-appellees are Rob Gheewalla, Gerry Cardinale, and
Jack Daly (collectively, the Defendants), who served as directors of
Clearwire at the behest of Goldman Sachs & Co. (Goldman Sachs).
NACEPFs Complaint alleges that the Defendants, even though they
comprised less than a majority of the board, were able to control Clearwire
because its only source of funding was Goldman Sachs.
According to
NACEPF, they used that power to favor Goldman Sachs agenda in

derogation of their fiduciary duties as directors of Clearwire. In addition to
2
North American Catholic Educational Programming Foundation, Inc. v. Gheewalla,

2006 WL 2588971 (Del. Ch. Sept. 1, 2006) (Opinion).
2
bringing fiduciary duty claims, NACEPFs Complaint also asserts that the
Defendants fraudulently induced it to enter into the Master Agreement with
Clearwire and that the Defendants tortiously interfered with NACEPFs
business opportunities.3
NACEPF is not a shareholder of Clearwire. Instead, NACEPF filed
its Complaint in the Court of Chancery as a putative creditor of Clearwire.
The Complaint alleges direct, not derivative, fiduciary duty claims against
the Defendants, who served as directors of Clearwire while it was either
insolvent or in the zone of insolvency.
Personal jurisdiction over the Defendants was premised exclusively
upon 10 Del.C. 3114, which subjects directors of Delaware corporations to
personal jurisdiction in the Court of Chancery over claims for violation of a
duty in [their] capacity [as directors of the corporation]. No other basis for
personal jurisdiction over the Defendants was asserted.
Accordingly,
NACEPFs efforts to bring its other claims in the Court of Chancery fail on
jurisdictional grounds unless those other claims are adequately alleged to be
sufficiently related to a viable fiduciary duty claim against the Defendants.
This action was initially filed in the Superior Court; it was dismissed without prejudice
for lack of subject matter jurisdiction. Transfer to the Court of Chancery was permitted
under 10 Del. C. 1902.
3
For the reasons set forth in its Opinion, the Court of Chancery
concluded: (1) that creditors of a Delaware corporation in the zone of
insolvency may not assert direct claims for breach of fiduciary duty against
the corporations directors; (2) that the Complaint failed to state a claim for
the narrow, if extant, cause of action for direct claims involving breach of
fiduciary duty brought by creditors against directors of insolvent Delaware
corporations; and (3) that, with dismissal of its fiduciary duty claims,
NACEPF had not provided any basis for exercising personal jurisdiction
over the Defendants with respect to NACEPFs other claims. Therefore, the
Defendants Motion to Dismiss the Complaint was granted.
In this opinion, we hold that the creditors of a Delaware corporation
that is either insolvent or in the zone of insolvency have no right, as a matter
of law, to assert direct claims for breach of fiduciary duty against the
corporations directors. Accordingly, we have concluded that the judgments
of the Court of Chancery must be affirmed.
Facts4
NACEPF is an independent lay organization incorporated under the
laws of Rhode Island. In 2000, NACEPF joined with Hispanic Information
and
Telecommunications
Network,
Inc.
(HITN),
Instructional
The relevant facts are primarily selected excerpts from the opening brief filed by
NACEPF in this appeal.
4
Telecommunications Foundation, Inc. (ITF), and various affiliates of ITF

to form the ITFS Spectrum Development Alliance, Inc. (the Alliance).
Collectively, the Alliance owned a significant percentage of FCC-approved
licenses for microwave signal transmissions (spectrum) used for
educational programs that were known as Instruction Television Fixed
Service spectrum (ITFS) licenses.
The Defendants were directors of Clearwire. The Defendants were
also all employed by Goldman Sachs and served on the Clearwire Board of
Directors at the behest of Goldman Sachs.
NACEPF alleges that the
Defendants effectively controlled Clearwire through the financial and other

influence that Goldman Sachs had over Clearwire.
According to the Complaint, the Defendants represented to NACEPF
and the other Alliance members that Clearwires stated business purpose
was to create a national system of wireless connections to the internet.
Between 2000 and March 2001, Clearwire negotiated a Master Agreement
with the Alliance, which Clearwire and the Alliance members entered into in
March 2001. NACEPF asserts that it negotiated the terms of the Master
Agreement with several individuals, including the Defendants. NACEPF
submits that all of the Defendants purported to be acting on the behalf of
Goldman Sachs and the entity that became Clearwire.
Under the terms of the Master Agreement, Clearwire was to acquire

the Alliance members ITFS spectrum licenses when those licenses became
available. To do so, Clearwire was obligated to pay NACEPF and other
Alliance members more than $24.3 million. The Complaint alleges that the
Defendants knew but did not tell NACEPF that Goldman Sachs did not
intend to carry out the business plan that was the stated rationale for asking
NACEPF to enter into the Master Agreement, i.e., by funding Clearwire.
In June 2002, the market for wireless spectrum collapsed when
WorldCom announced its accounting problems. It appeared that there was
or soon would be a surplus of spectrum available from WorldCom.
Thereafter, Clearwire began negotiations with the members of the Alliance
to end Clearwires obligations to the members. Eventually, Clearwire paid
over $2 million to HITN and ITF to settle their claims and; according to
NACEPF, was only able to limit its payments to that amount by otherwise
threatening to file for bankruptcy protection. These settlements left the
NACEPF as the sole remaining member of the Alliance. The Complaint
alleges that, by October 2003, Clearwire had been unable to obtain any
further financing and effectively went out of business.5
Complaint at 36 (Except for money advanced to it as a stopgap measure by Goldman

Sachs in late 2001, Clearwire was never able to raise any significant money.).
6
NACEPFs Complaint
In its Complaint, NACEPF asserts three claims against the
Defendants.
In Count I of the Complaint, NACEPF alleges that the
Defendants fraudulently induced it to enter into the Master Agreement and,

thereafter, to continue with the Master Agreement to preserv[e] its
spectrum licenses for acquisition by Clearwire.6 In Count II, NACEPF
alleges that because, at all relevant times, Clearwire was either insolvent or
in the zone of insolvency, the Defendants owed fiduciary duties to
NACEPF as a substantial creditor of Clearwire, and that the Defendants
breached those duties by:
(1) not preserving the assets of Clearwire for its benefit and that
of its creditors when it became apparent that Clearwire would
not be able to continue as a going concern and would need to be
liquidated and (2) holding on to NACEPFs ITFS license rights
when Clearwire would not use them, solely to keep Goldman
Sachss investment in play.7
In Count III, NACEPF claims that the Defendants tortiously interfered with
a prospective business opportunity belonging to NACEPF in that they
caused Clearwire wrongfully to assert the right to acquire NACEPF
6
7
Id. at 40.
Id. at 45.
7
wireless spectrum, which resulted in NACEPF losing the opportunity to

convey its licenses for spectrum to other buyers.8
Motions to Dismiss
The Defendants moved to dismiss the Complaint on two grounds:
first, for lack of personal jurisdiction under Court of Chancery Rule
12(b)(2); and, second, for NACEPFs failure to state a claim upon which
relief can be granted under Court of Chancery Rule 12(b)(6). With respect
to their first basis for dismissal, the Defendants noted that NACEPFs sole
ground for asserting personal jurisdiction over them is 10 Del.C. 3114.
The Defendants argued that personal jurisdiction under 3114 requires, at
least, sufficient allegations of a breach of fiduciary duty owed by directordefendants. With respect to their second basis for dismissal, the Defendants
contended that, even assuming that personal jurisdiction was sufficiently
alleged, NACEPFs Complaint failed to set forth allegations which
adequately supported any of its claims for relief, as a matter of law.
Court of Chancery Rule 12(b)(2)
The Court of Chancery initially addressed the Defendants motion
under Rule 12(b)(2).9
It began by examining the exercise of personal
Id. at 50.
See Branson v. Exide Elecs. Corp., 625 A.2d 267 (Del. 1993).
8
jurisdiction over nonresident directors of Delaware corporations under 10

Del.C. 3114:10
[T]he Delaware courts have consistently held that Section
3114 is applicable only in connection with suits brought against
a nonresident for acts performed in his . . . capacity as a director
. . . of a Delaware corporation. Further narrowing the scope of
Section 3114, Delaware cases have consistently interpreted
[early cases construing the section] as establishing that [it] . . .
appl[ies] only in connection with suits involving the statutory
and nonstatutory fiduciary duties of nonresident directors.11
10
The basis for personal jurisdiction relied upon by NACEPF, provides:

Every nonresident of this State who after September 1, 1977,
accepts election or appointment as a director, trustee or member of the
governing body of a corporation organized under the laws of this State or
who after June 30, 1978, serves in such capacity, and every resident of this
State who so accepts election or appointment or serves in such capacity
and thereafter removes residence from this State shall, by such acceptance
or by such service, be deemed thereby to have consented to the
appointment of the registered agent of such corporation (or, if there is
none, the Secretary of State) as an agent upon whom service of process
may be made in all civil actions or proceedings brought in this State, by or
on behalf of, or against such corporation, in which such director, trustee or
member is a necessary or proper party, or in any action or proceeding
against such director, trustee or member for violation of a duty in such
capacity, whether or not the person continues to serve as such director,
trustee or member at the time suit is commenced. Such acceptance or
service as such director, trustee or member shall be a signification of the
consent of such director, trustee or member that any process when so
served shall be of the same legal force and validity as if served upon such
director, trustee or member within this State and such appointment of the
registered agent (or, if there is none, the Secretary of State) shall be
irrevocable.
10 Del. C. 3114(a) (emphasis added).
11
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in
the Delaware Court of Chancery 3-5[a] (2005).
9
The Court of Chancery limited its Rule 12(b)(2) analysis to whether personal
jurisdiction existed over the Defendants with respect to Count II of the
Complaint.
Count II alleged that the Defendants breached their fiduciary duties
while they served as directors of Clearwire and while Clearwire was either
insolvent or in the zone of insolvency. The Court of Chancery concluded
that the facts alleged in the Complaint, as supported by the affidavit
submitted by NACEPF, constituted a prima facia showing of a breach of
fiduciary duty by the Defendants in their capacity as directors of a Delaware
corporation. Accordingly, the Court of Chancery held that a statutory basis
for the exercise of personal jurisdiction had been established by NACEPF
for purposes of litigating Count II of the Complaint.
NACEPF expressly premised its Rule 12(b)(2) arguments for personal
jurisdiction over the Defendants regarding Counts I and III (i.e., the nonfiduciary duty claims) on the Court of Chancerys first determining that
Count II (i.e., the fiduciary duty claim) survives the Defendants Rule
12(b)(6) motion to dismiss. Accordingly, the Court of Chancery proceeded
on the basis that if it found that Count II must be dismissed under Rule
12(b)(6), then it would be without personal jurisdiction over the Defendants
for purposes of moving forward with the merits of Counts I and III.
10
Therefore, to resolve the issue of personal jurisdiction, the Court of

Chancery was required to decide whether, as a matter of law, Count II of the
NACEPF Complaint properly stated a breach of fiduciary duty claim upon
which relief could be granted.
Court of Chancery Rule 12(b)(6)
The standards governing motions to dismiss under Court of Chancery
Rule 12(b)(6) are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii)
even vague allegations are well-pleaded if they give the
opposing party notice of the claim; (iii) the Court must draw all
reasonable inferences in favor of the non-moving party; and (iv)
dismissal is inappropriate unless the plaintiff would not be
entitled to recover under any reasonably conceivable set of
circumstances susceptible of proof.12
In the Court of Chancery and in this appeal, NACEPF waived any
basis it may have had for pursuit of its claim derivatively. Instead, NACEPF
seeks to assert only a direct claim for breach of fiduciary duties. It contends
that such direct claims by creditors should be recognized in the context of
both insolvency and the zone of insolvency. Accordingly, in ruling on the
12(b)(6) motion to dismiss Count II of the Complaint, the Court of Chancery
was confronted with two legal questions: whether, as a matter of law, a
corporations creditors may assert direct claims against directors for breach
12
In re General Motors (Hughes) Sholder Litig., 897 A.2d 162, 168 (Del. 2006)
(quoting Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
11
of fiduciary duties when the corporation is either: first, insolvent or second,

in the zone of insolvency.
Allegations of Insolvency and Zone of Insolvency
In support of its claim that Clearwire was either insolvent or in the
zone of insolvency during the relevant periods, NACEPF alleged that
Clearwire needed substantially more financial support than it had obtained
in March 2001.13 The Complaint alleges Goldman Sachs had invested $47
million in Clearwire, which represent[ed] 84% of the total sums invested in
Clearwire in March 2001, when Clearwire was otherwise virtually out of
funds.14
After March 2001, Clearwire had financial obligations related
to its agreement with NACEPF and others that potentially
exceeded $134 million, did not have the ability to raise
sufficient cash from operations to pay its debts as they became
due and was dependent on Goldman Sachs to make additional
investments to fund Clearwires operations for the foreseeable
future.15
The Complaint also alleges:
For example, upon the closing of the Master Agreement,
Clearwire had approximately $29.2 million in cash and of that
$24.3 million would be needed for future payments for
spectrum to the Alliance members. Clearwires burn rate was
13
Complaint at 30.
Id. at 7(a).
15
Id. at 7(b) (emphasis added). NACEPF also asserts that Clearwire was unable to
borrow money or obtain any other significant financing after March 2001, except from
Goldman Sachs. Id. at 7(c).
14
12
$2.1 million per month and it had then no significant revenues.

The process of acquiring spectrum upon expiration of existing
licenses was both time consuming and expensive, particularly if
existing licenseholders contested the validity of any Clearwire
offer that those license holders were required to match under
their rights of first refusal.16
Additionally, in the Complaint, NACEPF alleges that, [b]y October 2003,
Clearwire had been unable to obtain any further financing and effectively
went out of business. Except for money advanced to it as a stopgap measure
by Goldman Sachs in late 2001, Clearwire was never able to raise any
significant money.17
The Court of Chancery opined that insolvency may be demonstrated
by either showing (1) a deficiency of assets below liabilities with no
reasonable prospect that the business can be successfully continued in the
face thereof,18 or (2) an inability to meet maturing obligations as they fall
due in the ordinary course of business.19 Applying the standards applicable
to review under Rule 12(b)(6), the Court of Chancery concluded that
16
Id. at 30.
Id. at 36.
18
For that proposition, the Court of Chancery relied upon Production Res. Group v. NCT
Group, Inc., 863 A.2d 772, 782 (Del. Ch. 2004) (quoting Siple v. S & K Plumbing &
Heating, Inc., 1982 WL 8789, at *2 (Del. Ch. Apr. 13, 1982)); Geyer v. Ingersoll Publns
Co., 621 A.2d 784, 789 (Del. Ch. 1992) (explaining that corporation is insolvent if it has
liabilities in excess of a reasonable market value of assets held); and McDonald v.
Williams, 174 U.S. 397, 403 (1899) (defining insolvent corporation as an entity with
assets valued at less than its debts).
19
For that proposition, the Court of Chancery also relied upon Production Res. Group v.
NCT Group, Inc., 863 A.2d at 782 (quoting Siple v. S & K Plumbing & Heating, Inc.,
1982 WL 8789, at *2).
17
13
NACEPF had satisfactorily alleged facts which permitted a reasonable

inference that Clearwire operated in the zone of insolvency20 during at least
a substantial portion of the relevant periods for purposes of this motion to
dismiss. The Court of Chancery also concluded that insolvency had been
adequately alleged in the Complaint, for Rule 12(b)(6) purposes, for at least
a portion of the relevant periods following execution of the Master
Agreement.
Corporations in the Zone of Insolvency
Direct Claims for Breach of Fiduciary Duty
May Not Be Asserted by Creditors
In order to withstand the Defendants Rule 12(b)(6) motion to
dismiss, the Plaintiff was required to demonstrate that the breach of
fiduciary duty claims set forth in Count II are cognizable under Delaware
law.21 This procedural requirement requires us to address a substantive
question of first impression that is raised by the present appeal: as a matter
of Delaware law, can the creditor of a corporation that is operating within
20
In light of its ultimate ruling, the Court of Chancery did not attempt to set forth a
precise definition of what constitutes the zone of insolvency. See Credit Lyonnais
Bank Nederland N.V. v. Pathe Commcns Corp., 1991 WL 277613, at *34; see also
Production Res. Group v. NCT Group, Inc., 863 A.2d at 789 n.56 (describing the
difficulties presented in identifying zone of insolvency). Our holding in this opinion
also makes it unnecessary to precisely define a zone of insolvency.
21
See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004)
(In this case it cannot be concluded that the complaint alleges a derivative claim. . . .
But, it does not necessarily follow that the complaint states a direct, individual claim.
While the complaint purports to set forth a direct claim, in reality, it states no claim at
all.)
14
the zone of insolvency bring a direct action against its directors for an
alleged breach of fiduciary duty?
It is well established that the directors owe their fiduciary obligations
to the corporation and its shareholders.22
While shareholders rely on
directors acting as fiduciaries to protect their interests, creditors are afforded

protection through contractual agreements, fraud and fraudulent conveyance
law, implied covenants of good faith and fair dealing, bankruptcy law,
general commercial law and other sources of creditor rights.23 Delaware
courts have traditionally been reluctant to expand existing fiduciary duties.24
Accordingly, the general rule is that directors do not owe creditors duties
beyond the relevant contractual terms.25
In this case, NACEPF argues that when a corporation is in the zone of
insolvency, this Court should recognize a new direct right for creditors to
challenge directors exercise of business judgments as breaches of the
fiduciary duties owed to them. This Court has never directly addressed the
22
See Guth v Loft, 5 A.2d 503, 510 (Del. 1939) (while not technically trustees, directors
stand in a fiduciary relationship to the corporation and its shareholders); Malone v.
Brincat, 722 A.2d 5, 10 (Del. 1998).
23
See Production Res. Group v. NCT Group, Inc., 863 A.2d at 790.
24
See, e.g., Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 625 (Del. Ch.
2005), affd in part and revd in part on other grounds, 901 A.2d 106 (Del. 2006).
25
See, e.g., Simons v. Cogan, 549 A.2d 300, 304 (Del. 1988); Katz v. Oak Indus., Inc.,
508 A.2d 873, 879 (Del. Ch. 1986); Geyer v. Ingersoll Publns Co., 621 A.2d 784, 787
(Del. Ch. 1992); Production Res. Group v. NCT Group, Inc., 863 A.2d 772, 787 (Del. Ch.
2004).
15
zone of insolvency issue involving directors purported fiduciary duties to

creditors that is presented by NACEPF in this appeal.26 That subject has
been discussed, however, in several judicial opinions27 and many scholarly
articles.28
26
E. Norman Veasey & Christine T. Di Guglelmo, What Happened in Delaware

Corporate Law and Governance From 1992-2004? A Retrospective on Some Key
Developments, 153 U. Pa. L. Rev. 1399, 1432 (May 2005).
27
Credit Lyonnais Bank Nederland N.V. v. Pathe Commcns Corp., 1991 WL 277613
(Del. Ch.); Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del.
Ch. 2004); Trenwick America Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del.
Ch. 2006); Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 2006 WL 846121 (Del.
Ch.).
28
Rutheford B. Campbell, Jr. & Christopher W. Frost, Managers Fiduciary Duties in
Financially Distressed Corporations: Chaos in Delaware (and Elsewhere), 32 J. Corp.
L. 491 (2007); Richard M. Cieri & Michael J. Riela, Protecting Directors and Officers of
Corporations That Are Insolvent or In the Zone or Vicinity of Insolvency: Important
Considerations, Practical Solutions, 2 DePaul Bus. & Com. L.J. 295, 301-02 (2004);
Patrick M. Jones & Katherine Heid Harris, Chicken Little Was Wrong (Again):
Perceived Trends in the Delaware Corporate Law of Fiduciary Duties and Standing in
the Zone of Insolvency, 16 J. Bankr. L. & Prac. 2 (2007); Laura Lin, Shift of Fiduciary
Duty Upon Corporate Insolvency: Proper Scope of Directors Duty to Creditors, 46
Vand. L. Rev. 1485, 1487 (1993); Jonathan C. Lipson, Directors Duties to Creditors:
Power Imbalance and the Financially Distressed Corporation, 50 UCLA L. Rev. 1189
(2003); Ramesh K. S. Rao, et al., Fiduciary Duty A La Lyonnais: An Economic
Perspective on Corporate Governance in a Financially-Distressed Firm, 22 J. Corp. L.
53 (1996); Myron M. Sheinfeld & Harris Pippitt, Fiduciary Duties of Directors of a
Corporation in the vicinity of Insolvency and After Initiation of a Bankruptcy Case, 60
Bus. Law. 79 (2004); Robert K. Sahyan, Note, The Myth of the Zone of Insolvency:
Production Resources Group v. NCG Group, 3 Hastings Bus. L.J. 181 (2006). Vladimir
Jelisavcic, Corporate Law A Safe Harbor Proposal to Define the Limits of Directors
Fiduciary Duty to Creditors in the Vicinity of Insolvency: Credit Lyonnais Bank
Nederland N.V. v. Pathe Commcns Corp., 18 J. Corp. L. 145 (Fall 1993). See also
Selected Papers from the University of Marylands Twilight in the Zone of Insolvency
Conference: Stephen M. Bainbridge, Much Ado About Little? Directors Fiduciary
Duties in the Vicinity of Insolvency, 1 J.Bus.&Tech.L. 335 (2007); J. William Callison,
Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities Is Incorrect as a
Matter of Theory and Practice, 1 J.Bus.&Tech.L. 431 (2007); Larry E. Ribstein & Kelli
A. Alces, Directors Duties in Failing Firms, 1 J.Bus.&Tech.L. 529 (2007); Frederick
Tung, Gap Filling in the Zone of Insolvency, 1 J.Bus.&Tech.L. 607 (2007).
16
In Production Resources, the Court of Chancery remarked that

recognition of fiduciary duties to creditors in the zone of insolvency
context may involve:
using the law of fiduciary duty to fill gaps that do not exist.
Creditors are often protected by strong covenants, liens on
assets, and other negotiated contractual protections. The
implied covenant of good faith and fair dealing also protects
creditors. So does the law of fraudulent conveyance. With
these protections, when creditors are unable to prove that a
corporation or its directors breached any of the specific legal
duties owed to them, one would think that the conceptual room
for concluding that the creditors were somehow, nevertheless,
injured by inequitable conduct would be extremely small, if
extant. Having complied with all legal obligations owed to the
firm's creditors, the board would, in that scenario, ordinarily be
free to take economic risk for the benefit of the firm's equity
owners, so long as the directors comply with their fiduciary
duties to the firm by selecting and pursuing with fidelity and
prudence a plausible strategy to maximize the firm's value.29
In this case, the Court of Chancery noted that creditors existing
protectionsamong which are the protections afforded by their negotiated
agreements, their security instruments, the implied covenant of good faith
and fair dealing, fraudulent conveyance law, and bankruptcy lawrender
the imposition of an additional, unique layer of protection through direct
29
Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 790 (emphasis
added).
17
claims for breach of fiduciary duty unnecessary.30
It also noted that any
benefit to be derived by the recognition of such additional direct claims

appears minimal, at best, and significantly outweighed by the costs to
economic efficiency.31 The Court of Chancery reasoned that an otherwise
solvent corporation operating in the zone of insolvency is one in most need
of effective and proactive leadershipas well as the ability to negotiate in
good faith with its creditorsgoals which would likely be significantly
undermined by the prospect of individual liability arising from the pursuit of
direct claims by creditors.32 We agree.
Delaware corporate law provides for a separation of control and
ownership.33
The directors of Delaware corporations have the legal
responsibility to manage the business of a corporation for the benefit of its

shareholders owners.34 Accordingly, fiduciary duties are imposed upon the
directors to regulate their conduct when they perform that function.
Although the fiduciary duties of the directors of a Delaware corporation are
unremitting:
30
See, e.g., Big Lots Stores, Inc. v. Bain Capital Fund VII, LLC, 2006 WL 846121, at *8
(citing Stephen M. Bainbridge, Much Ado About Little? Directors Fiduciary Duties in
the Vicinity of Insolvency, 1 J.Bus.&Tech.L. 335 (2007).
31
Opinion at *13.
32
Id.
33
Malone v. Brincat, 722 A.2d 5 (1998).
34
Id. at 9.
18
the exact cause of conduct that must be charted to properly

discharge that responsibility will change in the specific context
of the action the director is taking with regard to either the
corporation or its shareholders. This Court has endeavored to
provide the directors with clear signal beacons and brightly
lined channel markers as they navigate with due care, good
faith, a loyalty on behalf of a Delaware corporation and its
shareholders. This Court has also endeavored to mark the safe
harbors clearly.35
In this case, the need for providing directors with definitive guidance
compels us to hold that no direct claim for breach of fiduciary duties may be
asserted by the creditors of a solvent corporation that is operating in the zone
of insolvency. When a solvent corporation is navigating in the zone of
insolvency, the focus for Delaware directors does not change: directors
must continue to discharge their fiduciary duties to the corporation and its
shareholders by exercising their business judgment in the best interests of
the corporation for the benefit of its shareholder owners. Therefore, we hold
the Court of Chancery properly concluded that Count II of the NACEPF
Complaint fails to state a claim, as a matter of Delaware law, to the extent
that it attempts to assert a direct claim for breach of fiduciary duty to a
creditor while Clearwire was operating in the zone of insolvency.
35
Id. at 10.
19
Insolvent Corporations
Direct Claims For Breach of Fiduciary Duty
May Not Be Asserted by Creditors
It is well settled that directors owe fiduciary duties to the
corporation.36 When a corporation is solvent, those duties may be enforced
by its shareholders, who have standing to bring derivative actions on behalf
of the corporation because they are the ultimate beneficiaries of the
corporations growth and increased value.37
When a corporation is
insolvent, however, its creditors take the place of the shareholders as the
residual beneficiaries of any increase in value.
Consequently, the creditors of an insolvent corporation have standing
to maintain derivative claims against directors on behalf of the corporation
for breaches of fiduciary duties.38 The corporations insolvency makes the
creditors the principal constituency injured by any fiduciary breaches that
diminish the firms value.39
Therefore, equitable considerations give
creditors standing to pursue derivative claims against the directors of an
36
See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
See, e.g., Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) partially overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
38
Agostino v. Hicks, 845 A.2d 1110, 1117 (Del. Ch. 2004); see also Tooley v. Donaldson,
Lufkin & Jenrette, Inc., 845 A.2d at 1036 (The derivative suit has been generally
described as one of the most interesting and ingenious of accountability mechanisms for
large formal organizations. (quoting Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 351
(Del. 1988); Guttman v. Huang, 823 A.2d 492, 500 (Del. Ch. 2003) (noting the
deterrence effects of meritorious derivative suits on faithless conduct.).
39
Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 794 n.67.
37
20
insolvent corporation. Individual creditors of an insolvent corporation have

the same incentive to pursue valid derivative claims on its behalf that
shareholders have when the corporation is solvent.
In Production Resources, the Court of Chancery recognized thatin
most, if not all instancescreditors of insolvent corporations could bring
derivative claims against directors of an insolvent corporation for breach of
fiduciary duty. In that case, in response to the creditor plaintiffs contention
that derivative claims for breach of fiduciary duty were transformed into
direct claims upon insolvency, the Court of Chancery stated:
The fact that the corporation has become insolvent does not
turn [derivative] claims into direct creditor claims, it simply
provides creditors with standing to assert those claims. At all
times, claims of this kind belong to the corporation itself
because even if the improper acts occur when the firm is
insolvent, they operate to injure the firm in the first instance by
reducing its value, injuring creditors only indirectly by
diminishing the value of the firm and therefore the assets from
which the creditors may satisfy their claims.40
Nevertheless, in Production Resources, the Court of Chancery stated
that it was not prepared to rule out the possibility that the creditor plaintiff
had alleged conduct that might support a limited direct claim.41 Since the
40
Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 776; see also
Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 2006 WL 2333201, at *22 n.75 (Del.
Ch.).
41
Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 800. The court
reserved the opportunity . . . to revisit some of these questions with better input from the
parties. Id. at 801.
21
complaint in Production Resources sufficiently alleged a derivative claim,

however, it was unnecessary to decide if creditors had a legal right to bring
direct fiduciary claims against directors in the insolvency context.42
In this case, NACEPF did not attempt to allege a derivative claim in
Count II of its Complaint. It only asserted a direct claim against the director
Defendants for alleged breaches of fiduciary duty when Clearwire was
insolvent. The Court of Chancery did not decide that issue. Instead, the
Court of Chancery assumed arguendo that a direct claim for a breach of
fiduciary duty to a creditor is legally cognizable in the context of actual
insolvency. It then held that Count II of NACEPFs Complaint failed to
state such a direct creditor claim because it did not satisfy the pleading
requirements described by the decisions in Production Resources43 and Big
Lots Stores, Inc. v. Bain Capital Fund VVI, LLC.44
42
Id.
In Production Resources, the Court of Chancery expressed in dicta a conservative
assumption that there might, possibly exist circumstances in which the directors [of an
actually insolvent corporation] display such a marked degree of animus towards a
particular creditor with a proven entitlement to payment that they expose themselves to a
direct fiduciary duty claim by that creditor. Production Resources Group, L.L.C. v.
NCT Group, Inc., 863 A.2d at 798. We think not. While there may well be a basis for a
direct claim arising out of contract or tort, our holding today precludes a direct claim
arising out of a purported breach of a fiduciary duty owed to that creditor by the directors
of an insolvent corporation.
44
Big Lots Stores, Inc. v. Bain Capital Fund VVI, LLC, 2006 WL 846121 (Del. Ch.). In
Big Lots, the Court of Chancery reiterated, also in dicta, that any potentially cognizable
direct claims asserted by creditors in actual insolvency should be confined to the limited
circumstances in Production Resources, namely, instances in which invidious conduct
toward a particular creditor with a proven entitlement to payment has been alleged.
43
22
To date, the Court of Chancery has never recognized that a creditor

has the right to assert a direct claim for breach of fiduciary duty against the
directors of an insolvent corporation. However, prior to this opinion, that
possibility remained an open question because of the arguendo assumption
in this case and the dicta in Production Resources and Big Lots Stores. In
this opinion, we recognize the pragmatic conduct-regulating legal realms . .
. calls for more precise conceptual line drawing.45
Recognizing that directors of an insolvent corporation owe direct
fiduciary duties to creditors, would create uncertainty for directors who have
a fiduciary duty to exercise their business judgment in the best interest of the
insolvent corporation. To recognize a new right for creditors to bring direct
fiduciary claims against those directors would create a conflict between
those directors duty to maximize the value of the insolvent corporation for
the benefit of all those having an interest in it, and the newly recognized
direct fiduciary duty to individual creditors.
Directors of insolvent
corporations must retain the freedom to engage in vigorous, good faith

negotiations with individual creditors for the benefit of the corporation.46
Accordingly, we hold that individual creditors of an insolvent corporation
Id. The suggestion in that dicta is also inconsistent with and precluded by our holding in
this opinion.
45
In Re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 65 (Del. 2006).
46
Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d at 797.
23
have no right to assert direct claims for breach of fiduciary duty against
corporate directors.
Creditors may nonetheless protect their interest by
bringing derivative claims on behalf of the insolvent corporation or any

other direct nonfiduciary claim, as discussed earlier in this opinion, that may
be available for individual creditors.
Conclusion
The creditors of a Delaware corporation that is either insolvent or in
the zone of insolvency have no right, as a matter of law, to assert direct
claims for breach of fiduciary duty against its directors. Therefore, Count II
of NACEPFs Complaint failed to state a claim upon which relief could be
granted. Consequently, the final judgment of the Court of Chancery is
affirmed.
24
EXHIBIT 3
SAMPLE MEMORANDUM
SQVlRE
LEGAL
SQUIRE, SANDERS & DEMPSEY L.L.P.
COUNSEL
WORLDWIDE
MEMORANDUM
To:
[Insert N arne of Distressed Company]
From:
Date:
SCOPE OF FIDUCIARY DUTIES
Re:
I.
INTRODUCTION
We wanted to summarize for the Company's Board of Directors (the "Board") the nature
and scope of their fiduciary duties under applicable law. As a threshold matter, the actions of
directors may be subject to challenge by shareholders or creditors when a company encounters
financial difficulty on the grounds that the directors breached their fiduciary duties to them by
not properly taking into account that group's best interests. There are a number of cases in
which directors have been held personally liable for certain actions that harmed creditors when
the corporation was insolvent, or when the actions taken by the directors rendered the
corporation insolvent.
In light of the often competing interests of shareholders and creditors, directors of
companies encountering financial difficulties must be sensitive to the fact that their fiduciary
duties may include consideration of creditors' interests as well as interests of shareholders, as
creditors become the corporation's stakeholders during insolvency. Until a corporation actually
commences a reorganization case under Chapter 11 of the United States Bankruptcy Code, the
duties of its directors are determined by applicable state law. Upon the commencement of a
Chapter 11 case, the duties of the directors of a corporate debtor-in-possession will be
determined in large part by the statutory provisions of the Bankruptcy Code.
As the Company is a Delaware corporation, this outline focuses primarily on the
fiduciary duties of directors of Delaware corporations and reviews applicable standards of
conduct in an attempt to provide some guidelines for directors of companies that might be
experiencing financial difficulty.
PHOENIXl528559.!
II.
FIDUCIARY DUTIES OF DIRECTORS
It is a basic principle of corporate law that directors of a solvent corporation owe

fiduciary duties to their corporation and its shareholders. The fiduciary duties of directors of
corporations include a duty of care and a duty of loyalty. In re Walt Disney Co. Deriv. LiNg.,
906 A.2d 27 (Del. 2006); Smith v. Van Gorkom, 488 A.2d 858,872-873 (Del. 1985).
A. Duty of Care. The duty of care requires that directors follow an informed and
reasonable deliberative process when making a business decision. This involves, for example,
attending meetings, asking questions, reviewing written materials, and otherwise informing
themselves of relevant information that is reasonably available to them. Aronson v. Lewis, 473
A.2d 805, 812 (Del. 1984). Directors are obligated to seek advice from experts, such as
attorneys, accountants, financial advisors and investment bankers. The duty of care also includes
a requirement that the directors reasonably inform themselves of available alternatives. The
more significant the subject matter of the decision, the greater the requirement is to probe and
consider alternatives. Having become informed, they must then act with requisite care in the
discharge of their duties. Aronson v. Lewis, A.2d 805, 812 (Del. 1984). The threshold issue of
whether directors as a board exercised an informed business judgment applies even though the
directors may have acted in good faith. Van Gorkom, 488 A.2d at 889.
B. Duty of Loyalty. The fiduciary duties of directors of a Delaware corporation also
include a broad and encompassing duty of loyalty to the corporation and its shareholders. The
duty of loyalty imposes on directors with an affirmative duty to protect and act in the best
interests of the corporation, and an obligation to refrain from conduct that would injure the
corporation and its shareholders, or deprive them of profit or advantage. Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 180 (Del. 1986). In other words, directors
must eschew any conflict between their duty to the corporation and their self-interest. See
Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d l334, l345 (Del. 1987).
III.
BUSINESS JUDGMENT RULE
The business judgment rule is an outgrowth of the principle that the business and affairs
of a corporation are managed by or under the direction of the board of directors. It was
developed by the courts to avoid undue second-guessing of director decisions. The business
judgment rule is "a presumption that in making a business decision, the directors of a corporation
acted on an informed basis, in good faith and in the honest belief that the action taken was in the
best interests of the company." Smith v. Van Gorkom, 488 A.2d at 872.
The rule's presumption is unavailable if fraud, bad faith or self-dealing is present. If the
presumption is either rebutted (because one of the elements-for example, good faith or due
care-is proved not satisfied) or is unavailable, directors must prove the intrinsic fairness of the
actions taken by them or face potential personal liability if a court sets aside such actions. Put
another way, good faith and exercise of due care are prerequisites to the availability of the
protection of the business judgment rule. See id; see also Brehm v. Eisner, 746 A.2d 244, 264
(Del. 2000).
PHOENIXI528559.1
IV.
FIDUCIARY DUTIES AND A CORPORATION'S CREDITORS
A. General. Absent special circumstances, directors of a solvent corporation do not owe

fiduciary duties to creditors. The relationship between a solvent corporation and its creditors is
contractual. See Geyer v. Ingersoll Publications Co., 621 A.2d 784, 787 (Del. Ch. 1992) ("the
general rule is that directors do not owe creditors duties beyond the relevant contractual tenns
absent 'special circumstances ... e.g. , fraud ... or a violation of a statute"') (citation omitted);
Katz v. Oak Industries, Inc., 508 A.2d 873, 879 (Del. Ch. 1986). In short, the directors of :
solvent corporation have : duty to maximize the value of the corporation for the benefit of its
equity holders.
B. Board Duties When Corporation is Insolvent. Historically, when a corporation
was insolvent, corporate officers and directors owed fiduciary duties to creditors of the
corporation. See Odyssey Partners, L.P. v. Fleming Companies, Inc., 735 A.2d 386, 417 (Del.
Ch. 1999) ("while directors nonnally do not owe creditors fiduciary duties, an exception exists in
the case of insolvency that 'creates fiduciary duties for directors for the benefit of creditors''')
(quoting Geyer v. Ingersoll, 621 A.2d at 787).
Under prior Delaware law, the prudent view was that directors of an insolvent
corporation continue to owe fiduciary duties to shareholders as well as creditors. In other words,
the directors' duty expanded to include creditors during insolvency. See Odyssey Partners, 735
A.2d at 417 ("fiduciary duties at the moment of insolvency may cause directors to choose a
course of action that best serves the entire corporate enterprise rather than any single group
interested in the corporation") (quoting Geyer v. Ingersoll, 621 A.2d at 787). Analogous federal
case law in the bankruptcy context, while making clear that the fiduciary duties owed run to
shareholders as well as creditors, suggests that, in the event of a conflict between shareholder
and creditor interests following insolvency, "the interests of shareholders become subordinated
to the interests of creditors." Commodity Futures Trading Com. V Weintraub, 471 U.S. 343,
355 (1985).
C. Recent Developments Concerning Insolvent Corporations and Corporations In
the "Zone" or "Vicinity" of Insolvency. A recent Delaware decision, however, has drastically
changed the landscape of directors' duties with respect to insolvent corporations and
corporations within the "zone" or "vicinity" of insolvency. In North American Catholic Educ.
Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007), the Delaware Supreme
Court found that in all situations-including insolvency--directors' duties are to the corporation
for the benefit of the corporation's stakeholders. When a corporation is solvent, those
stakeholders are shareholders. If a corporation is insolvent, there is no shift in the duty, but
rather "[the] creditors take the place of the shareholders as the residual beneficiaries of any
increase in value." Gheewalla, 930 A.2d at 101. The point here is that the directors' duties
essentially remain the same, but the duty is to the corporation as an enterprise. "Even when the
finn is insolvent, directors are free to pursue value maximizing strategies, while recognizing that
the finn's creditors have become its residual claimants and the advancement of their best
interests has become the finn's principal objective." Trenwick America Litigation Trust v. Ernst
& Young L.L.P., 906 A.2d 168,205 (Del. Ch. 2006). In the context of an insolvent corporation,
the Gheewalla decision recognizes that creditors have standing to pursue derivative causes of
PHOENIXJ528559.!
action arising from directors' breaches of fiduciary duty to the corporation. See Gheewalla, 930
A.2d at 101-02. Importantly, Gheewalla "precludes a direct claim arising out of a purported
breach of a fiduciary duty owed to that creditor by the directors of an insolvent corporation." Id.
at 103 n.43 (emphasis added).
The Gheewalla decision also addressed the ill-defined "zone" or "vicinity" of insolvency
theory of liability. Delaware case law once suggested that fiduciary duties may be owed to
creditors when the company is "in the vicinity of insolvency." Credit Lyonnais Bank Nederland.
N V v. Pathe Communications Corp., No. 12150, 1991 Del Ch. LEXIS 215, at *108 n.55 (Del.
Ch. Dec. 30, 1991). In the past, when a corporation was operating in the vicinity of insolvency
(also called the "zone of insolvency"), directors had to consider the interests of the corporation as
a whole. Id. ("[D]irectors will recognize that in managing the business affairs of a solvent
corporation in the vicinity of insolvency, circumstances may arise when the right (both the
efficient and the fair) course to follow for the corporation may diverge from the choice that the
stockholders (or the creditors, or the employees, or any single group interested in the
corporation) would make if given the opportunity to act").
Gheewalla, however, rejected the notion that directors' duties change while a corporation
is in the "zone" or "vicinity" of insolvency. See Gheewalla, 930 A.2d at 101 ("When a solvent
corporation is navigating in the zone of insolvency, the focus for Delaware directors does not
change: directors must continue to discharge their fiduciary duties to the corporation and its
shareholders by exercising their business judgment in the best interests of the corporation for the
benefit of its shareholder owners"); see also Nelson v. Emerson, 2008 Del. Ch. LEXIS 56, *3940 (Del. Ch. May 6, 2008); Production Resources Group L.L. C. v. NCT Group, Inc., 863 A.2d
772, 789 n.54 (Del. Ch. 2004) (even if a court adopts the "vicinity of insolvency" theory, a
creditor may not have standing to pursue a cause of action against a director in that context).
This makes sense in light of Gheewalla's restatement of fiduciary duties in the context of an
insolvent corporation. It also makes sense because the Delaware courts have never clearly
defined when a corporation will be deemed to be in the zone of insolvency. In fact, it has been
recognized that determining the "vicinity" or "zone" is not a simple exercise, especially when it
is oftentimes difficult to determine if a corporation is insolvent. See Production Resources, 863
A.2d at 789 n.56.
Despite the Gheewalla decision, directors of insolvent Delaware corporation or even a

corporation within the zone of insolvency should take special precaution when making decisions
during financially-troubled times. When the corporation is insolvent, directors may be exposed
to derivative claims by creditors for breaches of fiduciary duties to the corporation. The most
conservative approach while operating during insolvency or within the zone of insolvency would
be to act on behalf of the corporation as if the directors' duties ran to creditors.
V.
DETERMINATION OF INSOLVENCY
Whether a corporation is or is not insolvent may be extremely important given that such
finding may determine which parties are entitled to bring litigation under Delaware law. In this
regard, there are two general tests for determining whether a corporation is insolvent: the
"bankruptcy" test and the "equitable insolvency" test.
PHOENIXl528559.l
A. Bankruptcy Test. Under the "bankruptcy" or "balance sheet" test, a debtor is

insolvent when the sum of its liabilities exceeds the fair value of its assets. The Bankruptcy
Code provides that a corporation is insolvent when "the sum of such entity's debts is greater than
all of such entity's property, at a fair valuation .... " 11 U.S.C. 101(32).
When applying the bankruptcy test, debts are usually defined broadly to include
contingent, unliquidated, and disputed debts that may not be reflected on a balance sheet
prepared in accordance with generally accepted accounting principles. See, e.g., 11 U.S.C.
101(5) and (12) (Bankruptcy Code's definitions of "claim" and "debt"). But see In re Xonics
Photochemical, Inc., 841 F.2d 198, 200 (7th Cir. 1988) (contingent liabilities should be
discounted to reflect uncertainty, not valued on balance sheet at full face amount for purposes of
insolvency test).
B. Equitable Insolvency Test. Under the "equitable insolvency" test, a debtor is

insolvent if it lacks sufficient assets to pay its existing debts as they mature. Odyssey Partners,
735 A.2d at 417 ("insolvent corporation is defined as one that is 'unable to pay its debts as they
fall due in the usual course of business"') (quoting Geyer v. Ingersoll, 621 A.2d at 789).
The equitable insolvency test has been applied by the Delaware Court of Chancery. See
Francotyp-PostaliaAG & Co. v. On Target Technology, Inc., 1998 Del. Ch. LEXIS 234, *16-17
(Del. Ch. Dec. 24, 1998) (applying the equitable insolvency test instead of balance sheet
bankruptcy test).
VI.
"DEEPENING INSOLVENCY"
Historically, a theory that has been advanced in a number of cases against, among others,
officers and directors, is a claim for damages based on the concept of "deepening insolvency."
The theory of liability for damages for deepening insolvency was never well-defined nor was it
universally embraced by all courts, and there are few written judicial decisions concerning the
topic. Accordingly, creativity in the use of the theory abounds. Simply stated, the concept of
damages for deepening insolvency is that there are times when a defendant's conduct, either
fraudulently or negligently, prolongs the life a corporation, thereby increasing the corporation's
debt and exposure to creditors. Under the "deepening insolvency" theory, those with fiduciary
obligations may be liable for damages suffered by creditors for deepening the insolvency of a
corporation.
In the past, there were arguably three classes of possible defendants against whom this
legal theory has been directed. Officers and directors may be held personally liable concerning
actions taken that could be construed to prolong the life of a corporation to the detriment of
creditors, thereby deepening the insolvency of the corporation. The theory has also been used
against certain lenders as well as the company's professionals. Essentially, the theory of
deepening insolvency as against officers and directors has been used as a way to assert liability
for mismanagement using a hindsight test.
PHOENIXl528559.1
The crux of the deepening insolvency issue for the officers and directors of a corporation
was whether actions that are being taken, or not taken, essentially created a worsening situation
for the corporation's creditors. Recently, however, the deepening insolvency theory of liability
has been rejected by courts, including the Delaware courts. See, e.g., Trenwick America
Litigation Trust v. Ernst & Young L.L.P., 906 A.2d 168, 205 (Del. Ch. 2006) (rejecting
independent cause of action for deepening insolvency); Fehribach v. Ernst & Young L.L.P., 493
F.3d 905, 909 (7th Cir. 2007) (applying citing Trenwick for the proposition that the deepening
insolvency theory "makes no sense"); see generally Gheewalla, 930 A.2d 92. Accordingly,
officers and directors owe a Delaware corporation the general duties of care and loyalty. In this
regard, if a board acts with due diligence and in good faith, but the chosen strategy results in a
deepening insolvency, the "directors are protected by the business judgment rule. To conclude
otherwise would fundamentally transform Delaware law." Trenwick, 906 A.2d at 205.
The deepening insolvency theory of liability, again, was never a clearly defined cause of
action, and the cause of action is no longer viable with respect to Delaware corporations.
Notwithstanding, it is something that the Board as well as the officers of the Company should be
aware of.
VII.
SOME GUIDELINES FOR DIRECTORS OF FINANCIALLY CHALLENGED

COMPANIES
Directors of companies with financial difficulties may face a multitude of practical

problems in attempting to anticipate how their actions will be evaluated after the fact. If the
corporation is determined to be solvent, their actions will be evaluated in light of the best
interests of the corporation and its shareholders. In the event the corporation is later found to
have been insolvent, the directors may be held liable to the extent they did not act in the best
interests of corporation as a whole. During insolvency, the creditors take the place of the
shareholders as the stakeholders of a corporation, but the directors' duties remain the same. A
board, however, may be exposed to derivative claims by creditors for breach of fiduciary duties
during insolvency. Delaware courts reject the notion of a fiduciary duty change when a
corporation is in the "zone" or "vicinity" of insolvency.
As a general rule, directors of companies facing financial difficulties should review the
financial position of the corporation before taking action which may adversely affect either
shareholders or creditors, and should avoid any impairment (e.g., marginal, questionable or other
than arm's-length sales, pledges, or hypothecations) of corporate assets that would otherwise be
available to creditors. Further, the directors should take extra steps to ensure that proper
procedures are followed so that their decisions are based on a thorough and careful investigation
and informed consideration of available information, are taken in good faith, and are for a proper
corporate purpose.
PHOENIXl528559.\
EXHIBIT 4

MEMORANDUM
June 18,2010
MemoRe:
Fiduciary Duties for Directors of Troubled Companies
This memorandum discusses the fiduciary duties of directors of Delaware

corporations and whether those duties change when the corporation enters the zone of
insolvency or becomes insolvent. I
Fiduciary Duties of Directors

All directors owe the fiduciary duties of care and loyalty to their
organizations and are required to fulfill these duties in good faith.
Duty a/Care
The duty of care requires directors to exercise a requisite degree of care
and prudence in the process of making decisions and in carrying out directorial
responsibilities. 2 This means directors must inform themselves of all material
information reasonably available to them before making a business decision, and they
must act with the requisite care in discharging their duties. 3
Under Delaware law, corporate charters can exculpate directors, but not
officers, from liability for violations of the duty of care, so long as their actions are in
good faith and they do not intentionally violate the law. 4 This exculpation protects only
I
This memorandum only addresses Delaware law; fiduciary duty law varies by state.
See, e.g., Aronson v. Lewis, 473 A.2d 805,812 (Del. 1984).
!d. at 812.
Section 102(b)(7) of Delaware's General Corporations Law provides

... the certificate of incorporation may also contain ... [a] provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director: (i) For any breach of the
director' sduty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation oflaw; (iii) under 174 of this title; or (iv) for any
transaction from which the director derived an improper personal benefit.
US_ACTIVE:\20845416117179081.0003
directors who are conscientious in the discharge of their duties. The actions of a director
who consciously ignores his or her duties to the corporation will be deemed to lack good
faith or to involve intentional misconduct, causing that director to lose the protection of
the charter provision. 5 An example of a certificate of incorporation provision to
exculpate directors from liability for breaches of the duty of care to the extent permitted
under Delaware law is set forth below. 6
The General Corporation Law of Delaware allows directors to rely on
information provided by the corporation's officers, employees and other advisors, so long
as the director reasonably believes the information provided is within the scope of the
provider's professional or expert competence, and the person so relied upon has been
selected with care. 7 The duty of care still requires that a director evaluate advice and
DEL. CODE ANN. tit. 8 102(b)(7) (2008).
A director's indemnification and advancement rights under a corporate charter vest when
the company's obligations are triggered or when a claim is filed against the director. See
Schoon v. Troy Corp., Case No. 2362 (VCL), 2008 WL 821666, at *5 (Del. Ch. March
28, 2008). Because indemnification rights do not vest when a director begins service, a
corporation may amend its charter to limit coverage after a director has already served in
reliance on the charter's indemnification provision.
Brehm v. Eisner (In re Walt Disney Co. Derivative Litig.), 906 A.2d 27,66-67 (Del.
2006). Furthermore, courts may not dismiss duty of care claims on a motion to dismiss
based an exculpatory charter provision if a plaintiff sufficiently alleges a breach of the
duty of loyalty. See Bridgeport Holdings, Inc. Liquidating Trust v. Boyer (In re
Bridgeport Holdings, Inc.), 2008 WL 2235330 (Bankr. D. Del. 2008).
5
No director shall be personally liable to the Corporation or any of its

stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omission not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant to
Section 174 ofthe GCL or (iv) for any transaction from which the director
derived an improper personal benefit.
Section 141 (e) provides,

A member of the board of directors ... shall, in the performance of such
member's duties, be fully protected in relying in good faith upon the
records of the corporation and upon such information, opinions, reports or
statements presented to the corporation by any of the corporation's
officers or employees, or committees of the board of directors, or by any
other person as to matters the member reasonably believes are within such
other person's professional or expert competence and who has been
selected with reasonable care by or on behalf of the corporation.
US_ACTIVE:\20845416\17179081 ,0003
information critically and investigate further if there are facts or circumstances signaling
a need for additional information. 8 Furthermore, because a board of directors necessarily
relies on information provided by others, fulfilling the duty of care requires a board to
institute reasonably effective informational and reporting systems. In Care mark, the
Delaware Court of Chancery stated that "it is important that the board exercise a good
faith judgment that the corporation's information and reporting system is in concept and
design adequate to assure the board that appropriate information will come to its attention
in a timely manner as a matter of ordinary operations, so that it may satisfy its
responsibility.,,9 In short, Delaware corporate law recognizes the need for directors to
rely on information provided by others in making decisions, but it also requires directors
to act with care in ensuring that they are getting complete and accurate information.
Duty of Loyalty
The duty of loyalty requires directors to act in the best interests of the
confidentiality
corporation by avoiding conflicts of interest and self-dealing,
obligations and not abusing corporate opportunities for personal gain. I
Directors also breach the duty of loyalty if they fail to carry out their
duties, including their oversight duties, in good faith. I I The duty to act in good faith is an
overarching obligation to act with "a true faithfulness and devotion to the interests of the
corporation and its shareholders.,,12 The Delaware Supreme Court addressed the types of
conduct that might implicate the duty to act in good faith in Brehm v. Eisner. In Brehm,
the court distinguished between grossly negligent conduct on the part of a director, which
could not, without more, constitute bad faith, and more culpable conduct. 13 It found that
DEL. CODE ANN. tit. 8 141(e) (2008).

8
See Smith v. Van Gorkom, 488 A.2d 858, 874-75 (1985).
In re Caremarklnt'l Inc. Derivative Litigation, 698 A.2d 959, 970 (Del. Ch. 1996).
10 See e.g., In re eToys, Inc., 331 B.R. 176,200 (Bankr. D. Del. 2005) ("Under Delaware
law '[c]orporate officers and directors are not permitted to use their position of trust and
confidence to further their private interests .... and stand in a fiduciary relation to the
corporation and its stockholders.' ... The duty of loyalty 'requires an undivided and
unselfish loyalty to the corporation [and] demands that there shall be no conflict between
duty and self-interest."') (quoting Guth v. Loft, Inc., 5 A.2d 503,510 (Del. 1939) (internal
quotations omitted).
II
Stone v. Ritter, 911 A.2d 362, 369-70 (Del. 2006).
12 Brehm v. Eisner, 906 A.2d at 67.

13
!d. at 65.
us _ACTIVE:\208454 16\1 7\7908 1.0003
a failure to act in good faith could be shown for instance, "where a fiduciary intentionally
acts with a purpose other than that of advancing the best interests of the corporation,
where the fiduciary acts with the intent to violate applicable positive law, or where the
fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a
conscious disregard for his duties.,,14 A director who deliberately avoids acting in the
best interest of the corporation cannot evade liability by somehow showing that he or she
technically met the requirements of their fiduciary duties.
Business Judgment Rule

"The business judgment rule is a standard of judicial review for director
conduct, not a standard of conduct. The rule presumes that business decisions are made
by disinterested and independent directors on an informed basis and with a good faith
beliefthat the decision will serve the best interests of the corporation.,,15 In this way the
business judgment rule protects directors' ability to exercise their discretion when
making decisions on behalf of the corporation without fear of a court questioning the
wisdom of their decision in hindsight, so long as the decision-making process is sound
and free of conflicts of interest.
However, a plaintiff can overcome the judicial deference resulting from
the presumption of the business judgment rule by showing that a director has failed to act
with due care or loyalty, or lacked good faith in carrying out these duties. 16 Where a
plaintiff pleads facts overcoming the presumption of the business judgment rule,
"directors bear the burden of proving the fairness of the challenged conduct. ... Where
the party challenging the board's decision does allege and prove facts sufficient to
overcome the business judgment rule presumption, the rule has no applicability and the
challenged conduct is reviewed by the court to determine whether the conduct is fair to
the corporation and its shareholders, with the burden of proof resting upon the directors
who approved the transaction. Fairness thus 'becomes an issue only if the presumption
of the business judgment rule is defeated.'" 17
14
Id. at 67.
DENNIS J. BLOCK, NANCY E. BARTON, AND STEPHEN A. RADIN, THE BUSINESS

JUDGMENT RULE, FIDUCIARY DUTIES OF CORPORATE DIRECTORS VOL. I 4-5, 18-19
(Aspen Publishers, Inc. 1998).
IS
16 Cede & Co. v. Technicolor, Inc., 634 A.2d 345,360-61 (Del. 1993) ("To rebut the
[business jUdgment] rule, a shareholder plaintiff assumes the burden of providing
evidence that directors, in reaching their challenged decision, breached anyone of the
triads of their fiduciary duty-good faith, loyalty or due care").
17 THE BUSINESS JUDGMENT RULE VOL. I at 18-19,28-29 (quoting respectively Grabow v.

Perot, 539 A.2d 180, 187 (Del. 1988), Williams v. Geier, 671 A.2d 1368, 1384 (Del.
1996)). See also Brehm v. Eisner, 906 A.2d at 74 ("where business judgment
us_ACTIVE:120845416\17\79081.0003
Thus, where the party challenging the board's decision overcomes the
business judgment rule presumption, the court will scrutinize the fairness of the
challenged transaction on the merits. I8
To Whom Are the Duties Owed?

When a corporation is solvent, a directors' fiduciary duties run to
shareholders and to the corporation itself, but not to creditors. I9
Fiduciary Duties of Directors of Delaware Corporations in the Zone of Insolvency

The Zone of Insolvency
Courts have not defined the amorphous term "zone of insolvency;"
generally, it refers to the situation where an organization's financial condition
deteriorates to the point where it is at risk of becoming insolvent. 2o Until recently, certain
courts, primarily federal courts, including in Delaware, have held that the fiduciary duties
of directors of an insolvent corporation, or one in the zone of insolvency, extend to its
creditors? I However, as described below, the Delaware Supreme Court and the
Delaware Chancery Court have recently rejected this line of cases and made clear that
presumptions are applicable, the board's decision will be upheld unless it cannot be
'attributed to any rational business purpose"'); Beam v. Stewart, 845 A.2d 1040, 1048-49
(Del. 2004) (the business judgment rule provides directors "a presumption that they were
faithful to their fiduciary duties.").
Id. at 28; Cede & Co. v. Technicolor, Inc., 634 A.2d at 361. See also Weinberger v.
UOP, Inc., 457 A.2d 701, 711 (Del. 1983) ("The concept of fairness has two basic
aspects: fair dealing and fair price. The former embraces questions of when the
transaction was timed, how it was initiated, structured, negotiated, disclosed to the
directors, and how the approvals of the directors and the stockholders were obtained. The
latter aspect of fairness relates to the economic and financial considerations of the
proposed merger, including all relevant factors: assets, market value, earnings, future
prospects, and any other elements that affect the intrinsic or inherent value of a
company's stock").
18
19 See N Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92,99
(Del. 2007).
See id., at 98 (declining to define the zone of insolvency); Production Resources

Group, L.L.c. v. NCT Group, Inc., 863 A.2d 772, 790 (Del. Ch. 2004) (referring to the
zone of insolvency as "some imprecise and hard-to-define vicinity of insolvency").
20
See e.g., Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 N.Y.2d 541, 550 (N.Y.
2000).
21
US _ACTIVE:120845416\17179081.0003
directors' and officers' fiduciary duties do not change when the corporation enters the
zone of insolvency. Generally the federal courts, and state courts outside of Delaware,
will apply Delaware law to breach of fiduciary duty claims against directors of insolvent
.
22
DeIaware corporatIOns.
Duties Of Directors Do Not Change In Zone of Insolvency; But Creditors
Have Standing To Assert Derivative Claims Once The Company Is Insolvent
In 2007, the Delaware Supreme Court clarified the fiduciary duties that are
owed by directors of distressed and insolvent corporations in North American Catholic
Educational Programming Foundation, Inc. v. Gheewalla ("Gheewalla"). The court held
that "no direct claim for breach of fiduciary duties may be asserted by the creditors of a
solvent corporation that is operating in the zone of insolvency.23 When a solvent
corporation is navigating in the zone of insolvency, the focus for Delaware directors does
not change: directors must continue to discharge their fiduciary duties to the corporation
and its shareholders by exercising their business judgment in the best interests ofthe
corporationfor the benefit of its shareholder owners.,,24 Directors owe their fiduciary
duties to the corporation and its shareholders, even when the corporation is within the
zone ofinsolvency .z5 "When a corporation is solvent those duties may be enforced by its
shareholders .... When a corporation is insolvent, however, its creditors take the place of
the shareholders as the residual beneficiaries of any increase in value. Consequently, the
creditors of an insolvent corporation have standing to maintain derivative claims against
directors on behalf of the corporation for breaches of fiduciary duties. The corporation's
insolvency 'makes the creditors the principal constituency injured by any fiduciary
breaches that diminish the firm's value.,,2 Creditors of insolvent corporations may bring
derivative claims on behalf of the corporation. The Delaware Supreme Court has not
22 But see Stanziale v. Dalmia, (In re Allserve Stystems Corp.), 379 B.R. 69, 79 (Bankr.
D. N.J. 2007) (applying New Jersey law to a suit brought by a creditor against fiduciaries
of a company incorporated in Delaware, where the company operated in New Jersey and
the alleged breaches of fiduciary duty occurred there).
23 In Delaware, shareholders must sue directors derivatively if the alleged injury is
suffered by the corporation and the shareholder cannot show that his or her injury is
independent ofthe injury suffered by the corporation. See Tooley v. Donaldson, Lufkin &
Jenrette, Inc., 845 A.2d 1031, 1038 (Del. 2004).
24 Gheewalla, 930 A.2d at 101.
25 See Gheewalla, 930 A.2d at 103. Certain opinions had suggested that when a
corporation entered the zone of insolvency, these duties might shift to include creditors,
as the potential residual owners ofthe corporation. Credit Lyonnais Bank Nederland
N V v. Pathe Commc'ns Corp., 1991 WL 277613 (Del.Ch. Dec. 30,1991).
26
Id. at 102.
us_ACTIVE:\20845416\ 17\79081.0003
expressly addressed whether creditors of corporation operating in the zone of insolvency

have standing to bring a derivative claim for breach of fiduciary duty.
Fiduciary Duties For Directors of Insolvent Corporations Under Delaware Law

Definition of Insolvency
To plead insolvency, the Delaware Court of Chancery has required a
showing that (i) a company's liabilities exceed its assets and there is no reasonable
prospect that the business can be successfully continued, or (ii) the company is unable to
satisfy its obligations as they become due in the ordinary course ofbusiness. 27 These
tests are widely acknowledged to lack a bright line quality and are highly factual.
Duties of Directors of Insolvent Corporations

Even when the corporation becomes insolvent, directors continue to owe
their fiduciary duties to the corporation, not directly to the creditors. 28 In Gheewalla, the
court declined to impose on directors direct fiduciary duties to creditors because this
would "create a conflict between those directors' duty to maximize the value of the
insolvent corporation for the benefit of all those having an interest in it, and the newly
recognized direct fiduciary duty to individual creditors.,,29 Instead, directors of insolvent
corporations "must retain the freedom to engage in vigorous, good faith negotiations with
individual creditors for the benefit of the corporation.,,30
Creditors retain the ability to bring traditional direct law claims for breach
of contract against the corporation, as well as the many statutory remedies provided in the
Bankruptcy Code.
The Business Judgment Rule Continues To Apply To Directors of Insolvent

Corporations
Two recent Delaware Court of Chancery decisions provide further
guidance on the duties owed by directors of an insolvent corporation. The most extensive
discussion of such duties is by Vice Chancellor Strine in Trenwick America Litigation
27
Production Resources, 63 A.2d at 782.
28 The court did not discuss the specific constituencies to whom fiduciary duties are owed
by directors of an insolvent corporation, but in providing for derivative standing for
creditors the court indicates that duties are owed to the corporation. Gheewalla, 930
A.2d at 103.
29
Id.
30
Id.
US_ACTIVE:120845416\17\79081.0003
Trust v. Ernst & Young, L.L.p. 31 This case predates Gheewalla and was affirmed en banc
by the Delaware Supreme Court, which also cited it in Gheewalla. 32
The court in Trenwick dismissed breach of fiduciary duty claims by a
litigation trust controlled by creditors which were asserted against the directors of a
bankrupt specialty insurance company and its wholly-owned subsidiary. The trust
alleged that the company had insufficient reserves for the risky insurance it underwrote
and made imprudent acquisitions which resulted in the company's bankruptcy; these and
other transactions were alleged to have been recklessly undertaken when the company
was insolvent, or in the zone of insolvency, in dereliction ofthe directors' duties to
creditors. The court categorically rejected the creditor plaintiffs argument that a cause of
action exists for deepening insolvency. Even the directors of a near-insolvent corporation
may "exercise their business judgment [and] take action that might if it does not pan out
result in the firm being painted in a deeper hue of red. The fact that the residual
claimants of the firm at that time are creditors does not mean that the directors cannot
choose to continue the firm's operation in the hope that they can expand the inadequate
pie such that the firm's creditors get a greater recovery.,,33
The court also rejected the creditors' argument that they had standing to
pursue direct claims against directors through the litigation trust. Rather, the trust's claim
was a derivative one that could only be brought on behalf of the corporation. Therefore,
"the Litigation Trust's complaint must be analyzed solely from the perspective of
whether it pleads viable claims belonging to Trenwick America itself as an entity. ,,34
Creditors "of an insolvent firm have no greater right to challenge a disinterested, goodfaith business decision than the stockholders of a solvent firm.,,35
There is no need for courts to expand the common law of fiduciary duties
to protect creditors. 36 "Both state law and federal law provide a panoply of remedies in
31 906 A.2d 168, 172 (Del. Ch. 2006), Af!'d sub nom. Trenwick America Litigation Trust
v. Billet, 931 A.2d 438 (Del. 2007) (en banc).
32
Gheewalla, 930 A.2d at 99 n. 27.
33
Trenwick, 906 A.2d at 174.
34
I d. at 191.
35
I d. at 195.
36 Among the reasons courts have been reluctant to allow creditors to avail themselves of
the rights of shareholders to bring actions for breach of fiduciary duty against directors is
that creditors have numerous other remedies available to them. As the Gheewalla court
observed, "While shareholders rely on directors acting as fiduciaries to protect their
interests, creditors are afforded protection through contractual agreements, fraud and
fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy
US _ACTIVE:\20845416\17\79081.0003
order to protect creditors injured by a wrongful conveyance, including avoidance,

attachment, injunctions, appointment of a receiver, and virtually any other reliefthe
circumstances may require.,,37
Boards of insolvent corporations, like those of solvent corporations, have
wide latitude to approve or disapprove corporate transactions. "Delaware law imposes no
absolute obligation on the board of a company that is unable to pay its bills to cease
operations and liquidate. Even when the company is insolvent, the board may pursue, in
good faith, strategies to maximize the value of the firm. ,,38 Where the corporation is
insolvent, a board acting in good faith may pursue a strategy that involves the incurrence
of additional debt and does not become a guarantor of the strategy's success. Even in this
scenario, "the directors are protected by the business judgment rule. To conclude
otherwise would fundamentally transform Delaware law.,,39 Directors of distressed or
insolvent corporations have the flexibility to consider the consequences of their decisions
on each corporate constituency.40
Fiduciary Duties of Directors of a Corporation in Bankruptcy
The scope of a director's fiduciary duties expands in bankruptcy. When a
corporation enters chapter 11, it becomes a debtor in possession and is charged with the
rights and duties of a trustee and as such has a fiduciary duty to all parties with an interest
in the estate, including shareholders and creditors. 41 The duties in chapter 11 are still the
state law duties of care and 10yalty.42 When the interests of various constituencies are in
law, general commercial law and other sources of creditor rights." Gheewalla, 930 A.2d
at 99.
37
Trenwick, 906 A.2d at 199.
38 Id. at 204 (citations omitted).

39
Id. at 205.
See also Production Resources, 863 A.2d at 788 (interpreting the leading case on
director's duties to creditors before Gheewalla saying, "[t]he Credit Lyonnais decision' s
holding and spirit clearly emphasized that directors would be protected by the business
judgment rule if they, in good faith, pursued a less risky business strategy precisely
because they feared that a more risky strategy might render the firm unable to meet its
legal obligations to creditors and other constituencies.") (internal citations omitted).
40
41
See Commodity Futures Trading Comm 'n v. Weintraub, 471 U.S. 343, 355-56 (1985).
Id. at 352-53,355 (the functions and duties of a debtor-in-possession or a trustee in

bankruptcy are analogous to management's functions and duties outside of bankruptcy);
see also In re Ionosphere Clubs, Inc., 113 B.R. 164, 169 (Bankr. S.D.N.Y. 1990).
42
US _ACTIVE:\208454 1611717908 1.0003
conflict, the debtor in possession is required to treat each group "fairly" and cannot favor
one group without considering the impact on other groups, even if they are lower in
priority of payment under the Bankruptcy Code. 43
In bankruptcy, the debtor's officers and directors may continue to use, sell
or lease the corporation's property in the ordinary course ofbusiness. 44 They may also
pursue transactions outside the ordinary course of business if they get approval from the
bankruptcy court. 45 A court will approve non-ordinary course transactions that represent
a reasonable exercise of business judgment on the part of the debtor in possession. 46
Directors and officers of a company in bankruptcy may gain a level of
protection from suit when acting within the scope ofthe debtor in possession's authority
and pursuant to a court order. 47 To take advantage of this protection, directors and
officers must seek court approval for any transaction out of the ordinary course of
business. 48 Furthermore, the Delaware General Corporation Law permits the debtor in
possession to take actions carrying out a bankruptcy court order without further action by
the directors or shareholders. 49 Such power to act rests with an appointed trustee,
designated officers, or a representative appointed by the court. 50
See Weintraub, 471 U.S. at 355; Hall v. Perry (In re Cochise College Park, Inc.), 703
F.2d 1339, 1357 (9th Cir. 1983); Comm. of Equity Sec. Holders v. Lionel Corp. (In re
Lionel Corp'), 722 F.2d 1063, 1071 (2d Cir. 1983) (requiring debtor to demonstrate that
sale of substantially all of its assets was supported by valid business justification and was
not solely a reaction to the desires of the creditors committee).
43
44
11 U.S.C. 363(c)(1) (2008).
45
11 U.S.C. 363(b)(1) (2008).
See e.g., The Dai-Ichi Kangyo Bank, Ltd, v. Montgomery Ward Holding Corp. (In re
Montgomery Ward Holding Corp'), 242 B.R. 147, 153 (D. Del. 1991) (section 363 of the
Bankruptcy Code requires that the debtor's decision be supported by a "sound business
purpose").
46
See e.g., BradfordAudio Corp. v. Pious, 392 F.2d 67,72 (2d Cir. 1968) (granting a
court-appointed receiver immunity from liability resulting from carrying out a court
order); Pereira v. Foong (In re Ngan Gung Rest.), 254 B.R. 566, 570-71 (Bankr.
S.D.N.Y. 2000) ("a trustee is not liable for objectively reasonable mistakes in judgment
where discretion is allowed ... and, when acting in accordance with statutory or other
duty or pursuant to court order, he or she is immune from suit for personal liability for
such acts.").
47
48
See Mosser v. Darrow, 341 U.S. 267,274 (1951).
49
The statute provides,
US_ACTIVE:\20845416\17\79081.0003
10
Conclusion
Delaware case law is settled that regardless of the financial condition of
the corporation, the underlying duty of officers and directors runs to the corporation
itself. Officers and directors have a duty to manage the corporation in a good faith and
conflict-free effort to maximize value for all constituents. A corollary is that, in an effort
to maximize value for the benefit of all, officers and directors must make good faith
judgments among the potentially competing interests ofthe corporation's various
constituencies.
Any corporation of this state, an order for relief with respect to

which has been entered pursuant to the Federal Bankruptcy
Code ... may put into effect and carry out any decrees and orders of
the court or judge in such bankruptcy proceeding and may take any
corporate action provided or directed by such decrees and orders,
without further action by its directors or stockholders ....
DEL. CODE ANN.
50
tit. 8 303(a) (2008).
Id.
US _ACTIVE:\20845416117179081.0003
11
EXHIBIT 5
Morris JamesLLP
REVLON DUTIES UNDER DELAWARE LAW
Lewis H. Lazarus, Esq.

Jody C. Barillare, Esq.
Morris James LLP
500 Delaware Avenue, Suite 1500
Wilmington, Delaware 19801
302.888.6970
lIazarus@morrisjames.com
j barillare@morrisjames.com
JUNE 25,2010
Morris JamesLLP
Rev/on Duties Under Delaware Law
I.
REVLON DUTIES - OBTAIN THE BEST TRANSACTION REASONABLY AVAILABLE
a. If directors decide to put the company up for sale, they are bound to seek the
best transaction reasonably available. Revlon, Inc. v. MacAndrews v. Forbes
Holding, Inc., 506 A.2d 173 (Del. 1986).
1.
There is only one Revlon duty-to get "the best price for the stockholders at
a sale of the company." Lyondell Chemical Co. v. Ryan, 970 A.2d 235,
242 (Del. 2009) (quoting Revlon). Assuming all other things are equal,
directors cannot accept a lower price when a higher price is available.
11.
Revlon duties "refocus the board's traditional fiduciary duties and require
it to try in good faith to 'seek the best value reasonably available to the
stockholders.'" Binks v. DSL.net, Inc., 2010 WL 1713629, at *6 (Del. Ch.
Apr. 29,2010); see also Malpiede v. Townson, 780 A.2d 1075, 1083-84
(Del. 2001) ("Revlon neither creates a new type of fiduciary duty in the
sale-of-control context nor alters the nature of the fiduciary duties that
generally apply .... [Instead,] Revlon emphasizes that the Board must
perform its fiduciary duties in the service of a special objective
maximizing the sale price of the enterprise.").
111.
If the proposed transaction will eliminate all existing shareholders in

exchange for cash, the goal is to maximize immediate shareholder value.
McMullin v. Beran, 765 A.2d 910,918 (Del. 2000).
iv. Applying Revlon to the judgment of a board of a company on the "lip of

insolvency" is difficult because the value to the shareholders arising from
the competing transactions, liquidation vs. convertible financing, cannot
be easily reduced to a present value calculation. See Equity-Linked
Investors, LP v. Adams, 705 A.2d 1040, 1058 (Del. Ch. 1997) (finding
board acted reasonably in pursuit of the "highest achievable present value"
of the common stock in concluding in good faith that "the corporation's
interests were best served by a transaction that it thought would maximize
potential long-run wealth creation."). Such circumstances "are rich with

legitimate, indeed unavoidable, occasions for the exercise of good faith
business judgment." Id.
b. When are Revlon duties triggered? Revlon duties are typically triggered when
the company as a whole or control of the company is being sold. Paramount
Commn 's, Inc. v. QVC Network, Inc., 637 A.2d 34, 44 (Del. 1994).
1.
Corporation initiates active bidding process. Mills Acquisition Co. v.

MacMillan, Inc., 559 A.2d 1261 (Del. Ch. 1989)
ii. Target company responds to bidder's offer by abandoning its long term
strategy and seeking an alternative transaction involving the breakup of
the company. Paramount Commn 's, Inc. v. QVC Network, Inc., 637 A.2d
34 (Del. 1994); Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d
173 (Del. 1986).
iii. Approval oftransaction results in sale or change of control. QVC, 637
A.2d at 48 (Del. 1994); but see, In re Santa Fe Bane. Corp. Shareholder

Litig., 669 A.2d 59 (Del. 1995) (Revlon duties not triggered where control
of the corporation remains in a large, fluid and changing market).
c. Determining the "Best" Bid

1.
A seller may consider multiple aspects of a bid, not merely the price, in
determining which offer is the "best" to maximize value for the
shareholders. See QVC, 637 A.2d at 44 ("In determining which alternative
provides the best value for the shareholders, a board of directors is not
limited to considering only the amount of cash involved, and is not
required to ignore totally, its view of the future value of a strategic
alliance. ").
11.
"In assessing the bid and the bidder's responsibility, a board may consider,
among various proper factors, the adequacy and terms of the offer; its
fairness and feasibility; the proposed or actual financing for the offer, and
the consequences of that financing; questions of illegality; the impact of
both the bid and the potential acquisition on other constituencies, provided
that it bears some reasonable relationship to general shareholder interests;
-2-
the risk of non-consummation; the basic stockholder interests at stake; the

bidder' s identity, prior background and other business venture
experiences; and the bidder's business plans for the corporation and their
effects on stockholder interests." Mills Acquisition Co. v. Macmillan, Inc. ,
559 A.2d 1261, 1282 n. 29 (Del. 1988) (citing Ivanhoe Partners v.
Newmont Mining Corp., 535 A.2d 1334, 1341-42 (Del. 1987); Unocal
Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955-56 (Del. 1985); Revlon,
506 A.2d at 182-83.
111.
It is appropriate to consider the risk of the deal appearing "over-shopped,"

which could frustrate the consummation of any deal at all. Depending on
the characteristics of the marketplace and individual company being sold,
overshopping a deal can have a "deleterious effect on [the target
company's] attractiveness" and may be considered by the directors. State
of Wisconsin Inv. Bd. v. Bartlett, 2000 WL 238026, at *5 (Del. Ch. Feb. 24,
2000).
IV.
A seller may have "legitimate concerns" about a higher priced bid, such as
antitrust implications and risk, whether the bidder could obtain the
necessary financing and worries that the new bidder merely seeks to
undermine the existing deal for competitive reasons. In re Topps Co.
S'holder Litig., 926 A.2d 58,89 (Del. Ch. 2007).
d. Directors have an ongoing fiduciary duty to obtain the maximum price

reasonably available.
1.
Seller's directors have a continuing obligation to search for the best value
reasonably available to the stockholders. This continuing obligation
included the responsibility to evaluate critically both late-arriving offers
and an initial offer from the bidder, which the selling board preferred, to
determine if (a) either offer could be improved; (b) each ofthe respective
offers would be reasonably likely to come to closure, and under what
circumstances; (c) other material information was reasonably available for
consideration by the directors . . QVC, 637 A.2d at 49.
-3-
11.
Between the time the merger agreement is entered into and the
shareholders approve the merger, the directors of the target company "are
under continuing fiduciary duties to the shareholders to evaluate the
proposed transaction" and to exercise the fiduciary out provision if it no
longer is in the shareholder's best interests. Frontier Oil v. Holly Corp.,
2005 WL 1039027, at *27 (Del. Ch. Apr. 29,2005) (citing Omnicare, Inc.
v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003)).
e. Enhanced Scrutiny
1.
In determining whether directors have met their duty to achieve the best
transaction, courts apply enhanced scrutiny.
11.
Enhanced scrutiny means evaluation of:

1. The adequacy of the directors' decision-making process, including
the information on which it was based; and

2. The reasonableness of the directors' actions in light of the
circumstances. QVC, 637 A.2d at 45.
111.
The directors have the burden of proof in both areas of the analysis. In re
Toys 'R Us, Inc. S'holders Litig., 877 A.2d 975 (Del. Ch. 2005).
IV.
Reasonable, not pet/eet: A court should not ignore the complexity ofthe
directors' task in a sale of control. Many business and financial
considerations are implicated in investigating and selecting the best value

reasonably available. Accordingly, a court applying enhanced judicial
scrutiny should be deciding whether the directors made a reasonable
decision, not a perfect decision. Lyondell, 970 A.2d at 243; QVC, 637
A.2d at 45.
1. "If a board selected one of several reasonable alternatives, a court
should not second-guess that choice even though it might have
decided otherwise or subsequent events may have cast doubt on the
board's determination. Thus, courts will not substitute their
business judgment for that of the directors, but will determine if
-4-
the directors' decision was, on balance, within a range of

reasonableness." QVC, 637 A.2d at 46.
II.
PROCESS NECESSARY TO SATISFY REVLONDuTIES
a. No court can tell directors exactly how to fulfill their Revlon duties because
directors will be facing a unique combination of circumstances, many of which
will be outside their control. Lyondell, 970 A.2d at 242.
1.
The Delaware Supreme Court has noted that "there is no single blueprint
that a board must follow to fulfill its duties." Lyondell, 970 A.2d at 242;
Barkan v. Amsted Industries, Inc., 567 A.2d 1279, 1286 (Del. 1989).
Because there can be several reasoned ways to try to maximize value, the
court cannot find fault so long as the directors chose a reasoned course of
action. In re Lear Corp. S 'holder Litig., 926 A.2d 94, 115 (Del. Ch. 2007)
(citing Barkan).
11.
There is no requirement for an auction but the board must have a reliable
basis upon which to conclude the transaction selected is the best
reasonably available. Barkan v. Amsted Industries, Inc., 567 A.2d 1279,
1287 (Del. 1989). See also Wayne County Employees Ret. Sys. v. Corti,
2009 WL 2219260 (Del.Ch. July 24,2009) (dismissing claims that board
failed to satisfy Revlon duties even though it conducted no market check
prior to entering into challenged agreement).
b. Reasonable Process
1.
Factors weighing in favor of an appropriate process include the frequency

of meetings of a target board, efforts by its CEO to negotiate better terms,
and evidence that the board evaluated the company's value, the price
offered and the likelihood of obtaining a better price. Lyondell, 970 A.2d
at 242 (found that in the totality of the circumstances, the directors acted
in good faith even though they did not conduct an auction or market
check).
11.
Board of financially distressed company may prefer a financing

transaction that ultimately resulted in a sale of control, where it receives
- 5-
advice about alternatives from an independent financial advisory firm to

consider the various options that the company could pursue, and the
financial advisor, after a six-month long study, concludes that the only
option available that would avoid bankruptcy was the financing
transaction. Board reasonably may reject transactions predicated on
company entering into bankruptcy where shareholders were unlikely to
receive any value for their shares. Binks v. DSL.net, Inc., 2010 WL
1713629, at *8 (Del. Ch. Apr. 29, 2010).
111.
Merger Agreements with broad language allowing a seller meaningful

opportunity to consider better offers.
1. Broad "window-shop" provisions resulting in a post-signing
market check that was "quite open and broad." In re MONY
Group Inc. S'holder Litig., 852 A.2d 9, 24 n. 31 (Del. Ch. 2004).

2. In drafting provisions of merger agreements such as window shops
or fiduciary outs, the parties may grant the seller's board discretion
to consider a range of relevant factors when determining whether
an offer is a "superior proposal." See Flight Options Int'l, Inc. v.
Flight Options, LLe, 2005 WL 2335353, at *5 (Del. Ch. Jul. 11,

2005) (in order to be Superior Proposal under parties' purchase
agreement, it must, inter alia, "as a whole, present a more
favorable opportunity for Flight Options that the transactions
contemplated by [the Purchase Agreement])."
3. Conract provisions including stock options and expense
reimbursements necessary to induce buyer to bid will not violate
Revlon as improper lock-ups that preclude competitive bids,

particularly where window shop provision allows seller to
cooperate with bona fide buyers. Yanow v. Scientific Leasing, Inc.,
1988 WL 8772 *5 (Del.Ch. Feb. 8,1988).
4. Despite having a match right and a 4.3% break-up fee after the goshop period expired, Court of Chancery rejects Revlon challenge to
-6-
go-shop provision allowing a 40-day market check. In re Topps
Co., 926 A.2d at 86.
c. Unreasonable Process
1.
The seller board cannot simply reject a potential topping bid without first
attempting to resolve legitimate concerns through negotiation. In re Topps
Co. S'holder Litig., 926 A.2d 58,89-90 (Del. Ch. 2007).

11.
Failing to consider potential buyers without sufficient information to

justify exclusion. In re Netsmart Technologies, Inc. S 'holders Litig., 924
A.2d 171, 199 (Del. Ch. 2007) (finding plaintiffs stated reasonable
probability of success on merits of Revlon claim where board refused to
consider strategic buyers based on dated information).
111.
Favoring bidders, particularly those that propose to retain incumbent

management. In re Topps Co. S'holder Litig., 926 A.2d 58,87-88 (Del.
Ch.2007).
IV.
Where there are several offers, defensive tactics cannot be used to destroy
the auction process. Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del.
1989).
v. Overly restrictive merger agreements preventing adequate market checks

or consideration of "superior proposals."
1. Delaware courts have invalidated merger agreements without a
"fiduciary out" enabling directors to terminate and accept a
superior proposal, because such an agreement would prohibit
directors from fulfilling their fiduciary duties to maximize
shareholder value by preventing them from considering or
accepting superior proposals.
a. Although Revlon held that lock-ups are not per se invalid
(506 A.2d at 184), the Delaware Supreme Court in
Omnicare, Inc. v. NCS Healthcare, 818 A.2d 914 (Del.

2003) invalidated a merger agreement that did not contain a
fiduciary out which permitted the corporation to terminate
-7-
if it received a "superior proposal." Instead of agreeing to

an absolute defense of the chosen transaction from a
superior offer, the target board "was required to negotiate a
fiduciary out clause to protect the stockholders if the
transaction became an inferior offer." Omnicare, 818 A.2d
at 938. The target board "was required to contract for an
effective fiduciary out clause to exercise its continuing
fiduciary responsibilities." Id at 939.
b. The fiduciary out provisions also must not be so restrictive
that, as a practical matter, it would be impossible to satisfy
their conditions. Cirrus Holding Co. Ltd v. Cirrus
Industries, Inc., 794 A.2d 1191, 1207 (Del. Ch. 2001).
2. Overly restrictive No-Shop, No Talk, Lock-up provisions
a. No-shop provision that impermissibly interfered with
directors' ability to negotiate with other known bidders.
QVC, 637 A.2d at 49. A buyer cannot importune a target

board into a deal that effectively prevents the emergence of
a more valuable transaction or that disables the target board
from exercising its fiduciary duties of maximizing sale
pnce.
b. No-shop provisions that do not contain a fiduciary out are
likely to be viewed as per se invalid because the directors
would be prevented from fulfilling their fiduciary duties.
Directors "cannot be precluded by the terms of an overly
restrictive 'no-shop' provision from all consideration of
possible better transactions." Cirrus Holding Co. 794 A.2d
at 1207.
c. Directors cannot "willfully blind themselves to
opportunities that are presented to them," thus limiting the
reach of "no talk" provisions. Cirrus Holding Co. 794
A.2d at 1207.
-8-
d. Lock-ups that end an auction and foreclose further bidding

are improper. Mills Acquisition Co. v. MacMillan, Inc.,
559 A.2d 1261 (Del. Ch. 1989); Revlon v. MacAndrews &
Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
3. Exorbitant break-up fees
a. Break-up fees imposed upon the seller must be reasonable
so they do not meaningfully deter competing bids. See, e.g.,
County of York Employees Ret. Plan v. Merrill Lynch &
Co., Inc., 2008 WL 4824053, at *7 (Del. Ch. Oct. 28, 2008)
(stating that 4% is "testing the high-end of the termination
fees generally approved"); In re Toys "R" Us, Inc., S'holder
Litig., 877 A.2d 975 (Del. Ch. 2005) (approving 3.75%
fee); In re MONY Group, Inc., 852 A.2d 9 (Del. Ch. 2004)
(approving 3.3% fee); McMillan v. Intercargo Corp., 768
A.2d 492,505-06 (Del. Ch. 2000) (3.5% fee); Goodwin v.
Live Entm't, 1999 WL 64265, at *20 (Del. Ch. Jan. 25,
1999) (approving fee of3.l25% plus $1 million in
expenses for total percentage of 4.167%).
b. There is no bright-line "3% Rule" for break-up fees.
Louisiana Municipal Police Employees' Retirement Sys. v.
Crawford, 918 A.2d 1172, 1181 n. 10 (Del. Ch. 2007). The
inquiry is very fact intensive and cannot be reduced to a
mathematical equation. The court will consider a number
of factors, including without limitation: the overall size of
the termination fee, as well as its percentage value; the
benefit to shareholders, including a premium (if any) that
directors seek to protect; the absolute size of the transaction,
as well as the relative size of the partners to the merger; the
degree to which a counterparty found such protections to be
crucial to the deal, bearing in mind differences in
bargaining power; and the preclusive or coercive power of
-9-
all deal protections included in a transaction, taken as a
whole. Id.
c. Court will examine break-up fees and other deal protection
measures on a case by case basis and what is valid for one
transaction may not be appropriate in another. County of
York Employees Retirement Plan, 2008 WL 4824053 at *7
("[D]eal protection devices must be viewed in the overall

context; checking them off in isolation is not the proper
methodology.") Thus, the smaller the overall transaction
value, the more likely the court is to approve a break-up fee
that is a greater percentage of the overall deal value. In re
Topps Co., 926 A.2d at 86.
- 10-
William S. Creekmuir
Executive Vice President and Chief Financial Officer
Atlanta, GA
Bill joined Atlanta based Simmons Bedding Company, the second largest manufacturer of mattresses in
North America, as Executive Vice President and Chief Financial Officer in April 2000. Simmons, with
sales of approximately $1 billion, primarily under the brands Beautyrest, Beautyrest Black, Beautyrest
NxG, Beautyrest Studio, ComforPedic by Simmons, ComforPedic Loft, Natural Care,
Beautyrest BeginningsTM, and BeautySleep, employs over 3,000 employees, manufacturing in 20 plants
located in the United States, Canada and Puerto Rico. Bill had a key role in the 2003 sale of Simmons
from Fenway Partners to THL Partners and in the 2008-2010 balance sheet restructuring of Simmons
which included a pre-package bankruptcy filing in November 2009 and subsequent sale of the Company
in January 2010. Simmons is an investment of private equity sponsors Ares Management LLC and
Teachers' Private Capital, the private investment arm of Ontario Teachers' Pension Plan, who acquired
the Company in January 2010.
Prior to joining Simmons, Bill was Executive Vice President and Chief Financial Officer ofLADD
Furniture, Inc. from July 1992 through March 2000. LADD was the third largest publicly traded
residential furniture manufacturer, until its merger with La-Z-Boy, Inc. in January 2000.
Prior to joining LADD, Bill worked with the international public accounting firm KPMG from July 1977
through June 1992, in its audit department. He was elected to the partnership of KPMG in July 1987 and
served as partner in-charge of the national furniture manufacturing practice.
Bill graduated from The University of North Carolina at Chapel Hill. He is a Certified Public Accountant.
Bill is Chairman of the Statistics Committee of the International Sleep Products Association and is also a
member of the Board of Advisors to the Martha and Spencer Love School of Business at Elon University.
He is a former President of the American Furniture Manufacturers Association Finance Division and
former member of the Board of Directors of the North Carolina Association of CP As. Bill was a finalist
in 2008 for the Atlanta Business Chronicle's CFO of the Year.
Bill and his wife Frances have five children ranging in age from 29 to 12.
CRAIG D. HANSEN is a partner in the Bankruptcy & Restructuring Practice Group of Squire,
Sanders & Dempsey L.L.P. and is a nationally recognized restructuring lawyer, having played
prominent roles in some of the nation's largest and most complex restructurings in recent years.
He is best known for representing debtors, although Mr. Hansen also has an active practice
representing hedge funds and private equity funds, creditors committees and strategic and
financial investors in a wide variety of industry and market sectors. Mr. Hansen is continually
named in The Best Lawyers in America and recognized by Law & Politics as a Southwest Super
Lawyer. He is also ranked in Corporate Counsel Magazine as one of the best restructuring
lawyers in the United States. Mr. Hansen is a Fellow in the prestigious American College of
Bankruptcy Lawyers.
PHOENIXl528846.i
Lewis H. Lazarus
Partner
In his litigation practice, Lewis H. Lazarus serves as both lead and co-counsel in
complex corporate, commercial and fiduciary matters. His trial experience includes
individual, class and derivative actions alleging breach of fiduciary duties. That
experience informs his judgment in advising special committees and boards in
conflict of interest transactions.
His practice is primarily in the Delaware Court of Chancery and frequently involves
expedited proceedings, including actions for temporary restraining orders and
preliminary injunctions.
In addition, Lewis has served as lead counsel in matters involving:
500 Delaware Avenue, Suite 1500

Wilmington, Delaware 19801-1494
T 302.888.6970
F 302.571.1750
Ilazarus@morrisjames.com
PRACTICES
Corporate and Fiduciary Litigation
Business Litigation
EDUCATION
Stanford Law School, J.D., 1982
Swarthmore College, B.A., High Honors,
1978
BAR ADMISSIONS
Delaware, 1985
California, 1982
District of Columbia, 1989
Transactions where some directors are alleged to have conflicts of interest

Inspection of books and records
Appraisal actions
Determination of a corporation's officers and directors pursuant to Section
225 of the Delaware General Corporation Law
Disputes involving managers and members of Delaware limited liability
companies
Claims arising out of Delaware statutory trusts and Delaware limited
partnerships
Breach of contract actions in various settings including the enforceability of
covenants not to compete
Delaware Court Appointments

A respected member of Delaware's legal community, Lewis was appointed in 2008
by the Delaware Supreme Court to serve as vice chair of the court's Board on
Professional Responsibility.
Lewis has received several appointments from the Delaware Court of Chancery,
one to serve as a special discovery master, and another to serve as a trustee of a
Delaware corporation. As a trustee, he was responsible for selling its assets and
resolving disputed claims involving the company, which was owned by two 50percent stockholders.
Beyond the Courthouse
U.S. District Court, District of Delaware
Described by clients as "a credit to the Delaware Bar" and commended for his
"insightful approach" (Chambers 2009), as a "completely clear thinker" (Chambers
2006) and as someone who "knows how to make a real case" (Chambers 2007),
Lewis participates in numerous civic and professional activities. He has lectured to
attorneys on standards of review in conflict-of-interest transactions and on
intracorporate dispute resolution. Lewis has also traveled to Mexico, Europe,
Canada, South America and the Middle East to discuss the advantages of
Delaware law with business representatives.
Kristen K. McGuffey
Executive Vice President and General Counsel
Atlanta, GA
Kristen McGuffey joined Simmons in November 2001 and has served as Executive Vice
President, General Counsel and Secretary since March 2007. Prior to assuming her
current position, Ms. McGuffey served as Senior Vice President - General Counsel and
Secretary since August 2002 and prior to that served as Vice President - General Counsel
and Assistant Secretary. In her capacity as General Counsel, Ms. McGuffey handles an
array of strategic matters including mergers and acquisitions, complex litigation, product
safety and other regulatory matters, and board governance and compliance matters. Ms.
McGuffey was instrumental in navigating the legal complexities associated with the 2009
balance sheet restructuring and sale to Ares Capital/Teachers Private Capital.
Prior to joining Simmons, from March 2000 to October 2001, Ms. McGuffey was
employed by Viewlocity, Inc., a global supply chain management software company,
with the most recent position of Executive Vice President and General Counsel. From
March 1997 to February 2000, Ms. McGuffey was a partner of and, prior to that, an
associate at Morris, Manning & Martin LLP in the Technology Law Practice. She spent
her early legal career as an associate at the firm of Paul, Hastings, Janofsky & Walker
working on matters pertaining to complex litigation, white collar crime, and general
corporate law.
She serves on the Board of Directors of Our House, a non-profit daycare and transitional
care program that assists the needs of the marginally homeless in Atlanta.
She holds a BS in Electrical Engineering from Kettering Institute (formerly GMI
Engineering Management Institute), a JD from Harvard Law School, and is a member of
the State Bar of Georgia.
Hon. Elizabeth S. Stong

Judge Elizabeth S. Stong has served as U.S. Bankruptcy Judge for the Eastern District of New York since 2003.
Before entering on duty, she was a litigation partner and associate at Willkie FaIT & Gallagher in New York, an
associate at Cravath, Swaine & Moore, and law clerk to Hon. A. David Mazzone, U.S. District Judge in the
District of Massachusetts.
Judge Stong is a member of the Council of the American Law Institute, a Trustee of the Practising Law
Institute, Vice President of the Federal Bar Council, and a member of the International Insolvency Institute.
She is an officer of the ABA Business Law Section and serves on the ABA's Standing Committee on CLE. She
chairs the National Conference of Bankruptcy Judges International Judicial Relations Committee and has
trained judges in North Africa, the Middle East, and the Arabian Peninsula, and has also led judicial workshops
in Brazil and Argentina. She is an adjunct professor at St. John's University School of Law and Brooklyn Law
School.
Judge Stong previously served as President of the Harvard Law School Association, Vice President of the
Board of Directors of New York City Bar Fund Inc. and the City Bar Justice Center, Chair of the New York
City Bar's Alternative Dispute Resolution Committee, and Vice Chair of its Judiciary Committee. She was also
a member ofthe board of MFY Legal Services, Inc., one ofthe largest providers of free civil legal services to
low-income residents of New York City, and served on the ABA's Commission on Women in the Profession
and Commission on Homelessness and Poverty.
Judge Stong received her J.D. and A.B. magna cum laude from Harvard University.
January 2010
Ted S. Waksman
Partner, New York
ted.waksman@weil.com
767 Fifth Avenue
New York, NY 10153
Telephone: +1 2123108362
Facsimile: +1 2123108007
Practice
Business Finance & Restructuring
Mergers & Acquisitions
Ted Waksman is a partner in Weil, Gotshal & Manges' Corporate department and has been with the
firm since 1973. He has extensive experience in the areas of corporate restructurings, mergers &
acquisitions, securities law and acquisition and working capital financings.
As co-head of the firm's Corporate Restructuring practice, Mr. Waksman works with the firm's
bankruptcy and tax practitioners on Chapter 11 and out-of-court restructurings. He represents official
and unofficial note holder committees, distressed debt funds, senior creditors and companies being
restructured . His transactions in this area include the restructurings of Trump Entertainment Resorts,
Extended Stay Hotels, Delphi Corp. (as counsel to General Motors), Vertis Holdings, Aleris
International, Recycled Paper Greetings, WestPoint Stevens, Integrated Electrical Services, New
World Pasta, ChoiceOne Communications, Independent Wireless One (a Sprint affiliate), Arch
Wireless, Grand Union , Headway Corporate Resources, Avianca Airlines, Solutia, Safety-Kleen,
Envirosource, Ziff Davis Media, Iridium, Nationwide Credit, Montgomery Ward, Finova Group, Barneys,
Applied Graphics Technologies, Stage Stores and US Office Products.
Mr. Waksman has been involved in several public and private merger and acquisition transactions,
including the sale of Recycled Paper Greetings to American Greetings, the sale of Extended Stay
Hotels to affiliates of Centerbridge Partners, Paulson & Co. and Blackstone Real Estate Partners, the
sale of WestPoint Stevens to American Real Estate Holdings (an affiliate of Carllcahn), the sale of
Barneys New York to Jones Apparel Group, the sale of Applied Graphics Technologies to Kohlberg &
Co., the sale of Bethlehem Steel to International Steel Group, the sale of Grand Union to C&S
Wholesale Grocers, the sale of Envirosource to Wellspring Capital, the sale of Crystal Brands to
Phillips-Van Heusen and the acquisition of Maxim Pharmaceuticals by EpiCept Corporation.
Mr. Waksman has represented borrowers and commercial lenders in secured acquisition and working
capital financings and debtor-in-possession and exit financings, including GE Capital and Toronto
Dominion Bank. He has also represented institutional investors in private equity investments and
senior and subordinated debt investments.
Mr. Waksman is a member of the American Bar Association, its Section of Business Law and its
Commercial Financial Services Committee. He is also a member of the New York State Bar
Association and its Section of Banking, Corporation and Business Law, and is a member of the Tri-Bar
Opinion Committee.
Mr. Waksman received his B.S. from Cornell University, and his J.D. from New York University Law
School, where he was an editor of the NYU Law Review.
Education
New York University, JD
Cornell University, BS
June 2010

19 Jan 2016 Email To ENR Cheifs of Staff - How Could Fiduciary Duty Conflict With The Public and National Interest (Corrected)

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19 Jan 2016 Email To ENR Cheifs of Staff - How Could Fiduciary Duty Conflict With The Public and National Interest (Corrected)

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From:

Douglas Grandt answerthecall@me.com

MIUtiCAN BAA A$SOCIATION

Business law Section

INSOLVENCY AND FIDUCIARY DUTIES:

DIRECTORS AND OFFICERS FIDUCIARY DUTIES ....................................... 1

The Duty of Loyalty ...................................................................... 1

The Duty of Care ......................................................................... 2

The Business Judgment Rule ........................................................ 2

HOW DO THESE DUTIES CHANGE WHEN A CORPORATION

Zone or Vicinity of Insolvency ....................................................... 3

To Whom Are Fiduciary Duties Owed? .......................................... 4

A Word on "Deepening Insolvency" ............................................... 4

SPECIFIC CHAPTER 11 CONSiDERATIONS ................................................ 5

Duties During Chapter 11 Proceedings ......................................... 5

Revlon Duties and Their Application To A Chapter 11 ................... 6

COMMON CHAPTER 11 TRANSACTION STRUCTURES THAT

The 363 Sale ................................................................................ 7

The StandAlone Plan .................................................................... 8

The Plan Sponsor ......................................................................... 9

RESTRUCTURING TRANSACTIONS INVOLVING RELATED PARTIES ............. 9

The Use Of Special Committees In A Chapter 11 ......................... 10

SOME CAUTIONARY WORDS REGARDING D&O INSURANCE .................... 12

North American Catholic Educational Programming Foundation,

Companies Regarding Scope of Fiduciary Duties - Squire, Sanders &

Fiduciary Duties for Directors of Troubled Companies - Weil,

Rev/on Duties Under Delaware Law - Morris James LLP

DIRECTORS AND OFFICERS FIDUCIARY DUTIES.

loyalty and the duty of care.

Under Delaware law, corporate officers and

directors have identical fiduciary duties.

See Cant/er v. Stephens, 965 A.2d

So long as the directors and officers comply with

The Duty of Loyalty

In dealings with and on behalf of the corporation, directors

Directors must avoid self-dealing, observe confidentiality

not abuse corporate

A disqualifying interest can exist because a director is

Challenges to conflicts of interests can be cured by a

The duty of loyalty includes the obligation to act in good

A failure to act in good faith could be shown where a director

violate applicable law, or intentionally fails to act in the face

A director who deliberately avoids acting in the best interests

The duty of loyalty also includes the obligation to disclose

In matters before the board, a director must inform fellow

When seeking shareholder action on a matter involving a

The Duty of Care

prudence in the process of making decisions and in carrying out directorial

Directors must inform themselves of all material information

The General Corporation Law of Delaware allows directors to

signaling a need for additional

The Business Judgment Rule

making a business decision the director of a corporation acted on an informed

Standard of judicial review used by courts to determine when

Protects directors' ability to exercise their discretion when

A plaintiff can overcome the presumption of the business

HOW DO THESE DUTIES CHANGE WHEN A CORPORATION APPROACHES

What does it mean to be in the "zone" or "vicinity" of insolvency?

To whom are directors' fiduciary duties owed when a corporation is

Do creditors have claims for breaches of fiduciary duties against

Zone or Vicinity of Insolvency

There is no exact definition of the "zone" or "vicinity" of

insolvency, but generally, a corporation is considered in the "zone" or "vicinity"