The duty to creditors in near-insolvent firms: Eliminating the "near-insolvency" distinction

Vanderbilt Law Review

Volumn 60, Issue 4, 2007, Pages 1235-1272

  Kandestin, Cory Dean ^a  

^a NONE

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EID: 38149135675     PISSN: 00422533     EISSN: None     Source Type: Journal    
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References (177)

1. Claire Andre & Manuel Velasqeuz, Unmasking the Motives of the Good Samaritan, 2 ISSUES IN ETHICS (1989), http://www.scu.edu/ethics/publications/iie/v2n1/samaritan.html.
2. See Michael Anthony Slote, An Empirical Basis for Psychological Egoism, 61 J. PHIL. 530, 530-37 (1964).
3. See generally C.D. Broad, Egoism as a Theory of Human Motives, in BROAD'S CRITICAL ESSAYS ON MORAL PHILOSOPHY (David R. Cheney ed., 1971).
4. RESTATEMENT (SECOND) OF AGENCY § 385 (1958).
5. MODEL RULES OF PROF'L CONDUCT R. 1.7 (2002).
6. For example, it is said that one reason why so many corporations are chartered in Delaware is because of the expertise of the courts and the substantial body of case law, which provides a measure of predictability.
7. Corporate constituencies include groups that make up the entire corporate enterprise, for example, shareholders, creditors, employees, suppliers and customers. The term can include local communities, governments, and even NGOs.
8. Throughout this Note, I use the phrase "insolvent in fact" to refer to a firm that is clearly and objectively insolvent. The phrase "near-insolvent" refers to a firm that is not yet objectively insolvent, but not quite solvent either. The distinction is important because law that applies to firms that are "insolvent in fact" does not necessarily apply to firms that are "near-insolvent." The term "near-insolvency" encompasses what other courts and commentators sometimes characterize as "the vicinity of insolvency," "the zone of insolvency," "doubtful solvency," and "risk of insolvency." See infra note 76.
9. Pamela L.J. Huff & Russell C. Silberglied, From Production Resources to Peoples Department Stores: A Similar Response by Delaware and Canadian Courts on the Fiduciary Duties of Directors to Creditors of Insolvent Companies, 2 J. BUS. & TECH. L. (forthcoming 2007) (manuscript at *10), available at http://www.law.umaryland. edu/conferences/Twilight/SILBERGLEID%20&%20HUFF.PDF.
10. See, e.g., FDIC v. Sea Pines Co., 692 F.2d 973, 977 (4th Cir. 1982) (holding that directors of an insolvent corporation owe direct fiduciary duty to creditors in their capacity as trustees of corporate assets).
11. See, e.g., Prod. Res. Group, L.L.C. v. NCT Group, 863 A.2d 772, 788-89 (Del. Ch. 2004) (suggesting that there is no affirmative duty in near-insolvency, but rather that directors may benefit from an additional "shield" to protect them from shareholder lawsuits).
12. See, e.g., Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Change of Control Transactions: Is There any "There" There?, 75 S. CAL. L. REV. 1169, 1176-77 (2002) (explaining that outside of Revlon situations, directors may consider stakeholder interests if those interests are tied to the long-term value of the corporate enterprise).
13. See Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1282 n.29 (Del. 1989) (holding that a board of a target company may consider the impact of the bid on other constituencies, "provided that it bears some reasonable relationship to general shareholder interests"); see also Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990) (holding that unless Revlon duties are implicated, directors are not under a duty to maximize shareholder value in the short term and may thus favor a merger offering shareholders a lower premium, but, in the good faith belief of the directors, a better long-term value).
14. See, e.g., Official Comm. of Unsecured Creditors of Buckhead Am. Corp. v. Reliance Capital Group, Inc. (In re Buckhead America Corp.), 178 B.R. 956, 960 n.4 (Bankr. D. Del. 1994).
15. Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *20 (Del. Ch. Dec. 30, 1991). (considering an action by a 98% shareholder versus board of directors for pursuing less risky course of action arguably in favor of creditor interests and opposed to the shareholder's interests).
16. See id. at *108 n.55 (noting, in dictum, that when a corporation enters 'the vicinity of insolvency,' directors may consider creditor interests).
17. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985); Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).
18. See, e.g., DEL. CODE ANN. tit. 8, § 141(a) (2007) ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors . . . ."). There are some exceptions to the strict separation of functions between shareholders and directors, such as in certain forms of closely held corporations.
19. Directors often manage a corporation through the acts of their agents, the corporate officers.
20. ADAM SMITH, THE WEALTH OF NATIONS 700 (Modern Library 1937) (1776).
21. Brent Nicholson, Recent Delaware Case Law Regarding Director's Duties to Bondholders, 19 DEL. J. CORP. L. 573, 575 (1994).
22. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361-62 (Del. 1993); MODEL BUS. CORP. ACT § 8.30(a) (1984).
23. See Guth v. Loft, Inc., 5 A.2d 503, 511 (Del. 1939) (holding that if a director takes an opportunity that is (1) in the line of the corporation's business; (2) in which the corporation has a reasonable expectancy; and (3) the director's interest conflicts with the corporation's interest, then he may not seize the opportunity).
24. DEL. CODE ANN. tit. 8, § 144 (2007) (setting forth the requirements that must be met in order to cleanse an interested transaction).
25. See, e.g., Byrne v. Lord, Nos. 14040, 14215, 1995 Del. Ch. LEXIS 131, at *11 (Del. Ch. Nov. 9, 1995) (holding that a stock option compensation plan must involve an identifiable benefit to the corporation and must bear a reasonable relationship to the value of the services the corporation receives).
26. MODEL BUS. CORP. ACT § 8.30(b) (1984).
27. Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985).
28. Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 787 (Del. Ch. 1992) (citing Harff v. Kerkorian, 324 A.2d 215, 222 (Del. Ch. 1974), rev'd in part on other grounds, 347 A.2d 133 (Del. 1975)).
29. Gregory V. Varallo & Jesse A. Finkelstein, Fiduciary Obligations of Directors of the Financially Troubled Company, 48 BUS. LAW. 239, 244 (1992).
30. Id.
31. Ramesh K.S. Rao, David Simon Sokolow & Derek White, Fiduciary Duty a la Lyonnais: An Economic Perspective on Corporate Governance in a Financially Distressed Firm, 22 IOWA J. CORP. L. 53, 63 (1996) (the author uses the term "bankruptcy test" rather than "balance sheet test," although they both refer to the same test).
32. Id.
33. Wood v. Dummer, 30 F. Cas. 435. 436 (C.C.D. Me. 1824) (No. 17,944).
34. See Laura Lin, Shift of Fiduciary Duty Upon Corporate Insolvency: Proper Scope of Director's Duty to Creditors, 46 VAND. L. REV. 1485, 1494-96 (1993) (noting the differences between shareholder and bondholder incentives in a near-insolvent corporation).
35. Jewel Recovery, L.P. v. Gordon (In re Zale Corp.), 196 B.R. 348, 354-55 (Bankr. N.D. Tex. 1996).
36. Wood, 30 F. Cas. at 435.
37. Id. at 436.
38. Id.
39. Asmussen v. Quaker City Corp., 156 A. 180 (Del. Ch. 1931).
40. Id. at 181.
41. Bovay v. H.M. Byllesby & Co., 38 A.2d 808 (Del. 1944).
42. Id. at 813 (citations omitted).
43. Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784 (Del. Ch. 1992).
44. Id. at 786-87.
45. Id. at 787.
46. Id. (emphasis in original).
47. Id. at 790 ("[F]iduciary duties to creditors arise when one is able to establish the fact of insolvency.").
48. Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991).
49. Id.
50. A leveraged buyout is a mechanism by which a "management or finance entrepreneur acquires control of a company through borrowed funds." Id. at *2. The entrepreneur raises money by having the target company issue debt instruments to finance its own acquisition. Ideally, the entrepreneur would take over the company, sell off non-core assets and turn the core business into a more efficient enterprise. The debt should be paid off over time from the target's own revenue stream. When unsuccessful, LBOs can lead to insolvency of the company, since the company's debts are often a crushing burden.
51. Id. at *6.
52. Id.
53. Id. at *4. Chancellor Allen likely meant that the financing scheme was intricate and complicated, although it is conceivable that he used the word "Byzantine" to refer to the deal as scheming or devious. Id.
54. Id. at *6.
55. Id.
56. Id.
57. Id.
58. Id. at *14.
59. Id. at *2.
60. Id. at *11 n.22.
61. Id. at *11.
62. Id. at *12.
63. Id. at *19.
64. Id. at *21.
65. Id. at *34.
66. Id. at *34 n.55.
67. The breach of th[e] duty [that directors owe to creditors in their capacity as trustee] gives rise to a claim that can be pursued by the creditors. Delaware may have expanded this duty, as distinguished from the directors' fiduciary duty to the corporation, when the corporation operates within a zone of insolvency. Jewel Recovery, L.P. v. Gordon (In re Zale Corp.), 196 B.R. 348, 354-55 (Bankr. N.D. Tex. 1996) (citations omitted).
68. Steinberg v. Kendig (In re Ben Franklin Retail Stores, Inc.), 225 B.R. 646, 655-56 (Bankr. N.D. Ill. 1998).
69. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 788 (Del. Ch. 2004)
70. Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784 (Del. Ch. 1992); see, e.g., Jewel Recovery, 196 B.R. at 354-55 (noting that Delaware may have expanded the duty to creditors from insolvency to near-insolvency).
71. Id. at 787, 790.
72. Jewel Recovery, 196 B.R. at 355.
73. Weaver v. Kellogg, 216 B.R. 563, 583-84 (Bankr. S.D. Tex. 1997).
74. Jewel Recovery, 196 B.R. at 354-55.
75. Id. at 354.
76. Id. at 354-55 (emphasis added) (citations omitted).
77. Near-insolvency has never been adequately defined. See, e.g., Peoples Dep't Stores, Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 493 (Can.) ("The directors' fiduciary duty does not change when a corporation is in the nebulous 'vicinity of insolvency.' That phrase has not been defined; moreover, it is incapable of definition and has no legal meaning. What it is obviously intended to convey is a deterioration in the corporation's financial stability."). There is no magic line that can be inserted somewhere between solvency and insolvency denoting the exact point at which insolvency happens. For example, the same firm may be deemed insolvent according to one method (such as the balance sheet test) but solvent according to another (such as the equitable insolvency test). This reflects the inherent unpredictability of associating a shift of fiduciary duties with the near-insolvency standard.
78. Official Comm. of Unsecured Creditors of Buckhead Am. Corp. v. Reliance Capital Group, Inc. (In re Buckhead Am. Corp.), 178 B.R. 956, 968 (Bankr. D. Del. 1994).
79. Id. at 959-60.
80. Id. at 960.
81. Id. at 959.
82. Id.
83. Id.
84. Id.
85. Id. at 960.
86. Id.
87. Id. at 968.
88. Id.
89. The specific words relied upon by the court were: " '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,' including the corporation's creditors." Id. (citation omitted) (quoting Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991)).
90. Jewel Recovery, L.P. v. Gordon (In re Zale Corp.), 196 B.R. 348, 354-55 (Bankr. N.D. Tex. 1996).
91. In re Buckhead Am. Corp., 178 B.R. at 968.
92. Steinberg v. Kendig (In re Ben Franklin Retail Stores, Inc.), 225 B.R. 646, 655-56 (Bankr. N.D. Ill. 1998).
93. Specifically, the creditors claimed that the defendants were liable for "wrongfully prolonging the Debtors' corporate lives beyond the point of insolvency by misrepresenting the true value of the Debtor's accounts receivable." Id. at 649.
94. Id. at 653.
95. Id.
96. Id.
97. Id.
98. [I]n 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. Id. at 655 (citation omitted) (quoting Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *34 n.55 (Del. Ch. Dec. 30, 1991)).
99. The potential "opportunistic behavior" about which the chancellor expressed concern, then, was the disposition of property at "fire sale prices" for the sole benefit of the shareholder, and unreasonable risk-taking, also for the sole benefit of shareholders, with corporate assets. . . . The chancellor's solution was to shield such directors from liability to shareholders by declaring that their duty is to serve the interests of the corporate enterprise, encompassing all its constituent groups, without preference to any. Id.
100. Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784, 787-88 (Del. Ch. 1992) (recognizing the existence of a duty to creditors when a corporation is insolvent in fact).
101. In re Ben Franklin Retail Stores, Inc., 225 B.R. at 655 (citation omitted) (quoting Geyer, 621 A.2d at 789).
102. Id. at 656.
103. Id.
104. Although directors can also be held liable for breach of the duty of care, corporate charters often exculpate directors from liability for breach of the duty of care. See, e.g., DEL. CODE ANN. tit. 8, § 102(b)(7) (2007) (authorizing a corporation to exculpate its directors from liability for breach of the duty of due care, subject to certain exceptions).
105. Lin, supra note 33, at 1513 (citation omitted), quoted in In re Ben Franklin Retail Stores, Inc., 225 B.R. at 655.
106. Bank of Am. v. Musselman, 222 F. Supp. 2d 792, 797 (E.D. Va. 2002).
107. Id. at 799 n.17.
108. Id. at 799-801 (discussing Helm Fin. Corp. v. MNVA R.R., 212 F.3d 1076 (8th Cir. 2000); In re Ben Franklin Retail Stores, Inc., 225 B.R. at 646; First Nat'l Bank of Boston v. Une, No. 87 C 10831, 1988 WL 130050 (N.D. Ill. 1988); St. James Capital Corp. v. Pallet Recycling Assocs. of N. Am., 589 N.W.2d 511 (Minn. App. 1999)).
109. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 797 (Del. Ch. 2004).
110. Vice Chancellor Strine deferred answering his own hypothetical, stating that "there are a myriad of policy considerations that would arise by the indulgence or non-indulgence of a fiduciary duty claim of this type and I am reluctant to ponder their viability without better help." Id.
111. Vice Chancellor Strine raises the possibility that a creditor in this situation can directly sue for breach of fiduciary duty. Under Delaware law, a corporation may favor one creditor over another, unless the favored creditor is an insider. Asmussen v. Quaker City Corp., 156 A. 180 (Del. Ch. 1931). However, the court assumed, for the purposes of its opinion, that "there might, possibly exist circumstances in which the directors 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." Prod. Res. Group,, 863 A.2d at 798.
112. Prod. Res. Group, 863 A.2d at 772.
113. For an in-depth discussion of Vice Chancellor Strine's opinion, see Huff & Silberglied, supra note 8.
114. Prod. Res. Group, 863 A.2d at 774.
115. Id. at 799-800.
116. Id. at 792. ("[T]he transformation of a creditor into a residual owner does not change the nature of the harm in a typical claim for breach of fiduciary duty by corporate directors.").
117. Id.
118. According to the court, "the reason for this bears repeating - the fact of insolvency does not change the primary object of the director's duties, which is the firm itself. The firm's insolvency simply makes the creditors the principal constituency injured by any fiduciary breaches that diminish the firm's value." Id.
119. The court characterized near-insolvent firms as firms within the "zone of insolvency." Id. at 790.
120. Id.
121. Id.
122. Id.
123. Id. ("[W]ith 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.").
124. Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *34 n.55 (Del. Ch. Dec. 30, 1991).
125. Courts have come to different conclusions on whether the business judgment rule applies to decisions made during insolvency. For an example of a court declining to apply the business judgment rule, see Mims v. Kennedy Capital Mgmt., Inc. (In re Performance Nutrition, Inc.), 239 B.R. 93, 111 (Bankr. N.D. Tex. 1999) ("[T]he business judgment rule may be wholly inapplicable in a case where the corporation is insolvent."); see also Unsecured Creditors Comm. v. Gen. Homes Corp. (In re Gen. Homes Corp.), 199 B.R. 148, 151-52 (Bankr. S.D. Tex. 1996) ("[M]oreover, while the business judgment rule may apply to the decisions of solvent corporations, it has no consequence in the context of a conservatorship."). For an example of a court applying the business judgment rule, but ruling in favor of creditors, see Official Comm. of Unsecured Creditors of Toy King Distribs., Inc. v. Liberty Sav. Bank (In re Toy King Distribs., Inc.), 256 B.R. 1 (Bankr. M.D. Fl. 2000). For an example of a court applying the business judgment rule and holding in favor of the debtor corporation, see Odyssey Partners, L.P. v. Fleming Co., 735 A.2d 386 (Del. Ch. 1999).
126. Prod. Res. Group, 863 A.2d at 788.
127. Id. at 792.
128. Id. ("[T]he business judgment rule remains important and provides directors with the ability to make a range of good faith, prudent judgments about the risks they should undertake on behalf of troubled firms.").
129. Huff & Silberglied, supra note 8, at *10.
130. Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150, 1991 WL 277613, at *34 n.55 (Del. Ch. Dec. 30, 1991).
131. See, e.g., DEL. CODE ANN. tit. 8, § 144 (2007).
132. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361-62 (Del. 1993) (duty of loyalty); Aronson v. Lewis, 473 A.2d 805, 812-13 (Del. 1984) (duty of care and the business judgment rule); MODEL BUS. CORP. ACT § 8.30(a) (1984) (duty of loyalty).
133. Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 DUKE L.J. 879, 882.
134. For a discussion of how the shift of fiduciary duty to creditor is not supported by two leading classical theories of fiduciary duty, contractarian and fiduciarian, see J. William Callison, Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities is Incorrect as a Matter of Theory and Practice, 2 J. BUS. & TECH. L. (forthcoming 2007), available at http://www.law.umaryland.edu/conferences/Twilight/CALLISON. PDF.
135. Id. (listing common arguments against the shift of fiduciary duties to creditors in the vicinity of insolvency).
136. Janis Sarra, Wise People, Fiduciary Obligation and Reviewable Transactions, Director's Liability to Creditors, in ANNUAL REVIEW OF INSOLVENCY LAW (Janis Sara ed., 2004).
137. Id. at 75.
138. Id.
139. Some commentators have argued that insolvency duties should be owed only to certain types creditors, such as unsecured creditors or tort-claimants. See e.g., J.C. Lipson, Director's Duties to Creditors: Power Imbalance and the Financially Distressed Corporation, 50 UCLA L. REV. 1189 (2003).
140. See supra Part III.B.
141. Official Comm. of Unsecured Creditors of Buckhead Am. Corp. v. Reliance Capital Group Inc. (In re Buckhead America Corp.), 178 B.R. 956 (Bankr. D. Del. 1994); Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004).
142. Jewel Recovery, L.P. v. Gordon (In re Zale Corp.), 196 B.R. 348 (Bankr. N.D. Tex. 1996).
143. Geyer v. Ingersoll Publ'ns Co., 621 A.2d 784 (Del. Ch. 1992).
144. David Wishart, Models and Theories of Directors' Duties to Creditors, 14 NEW ZEALAND U. L. REV., 323, 344 (1991).
145. Andrew Keay, The Director's Duty to Take into Account the Interests of Company Creditors: When is it Triggered?, 2001 MELBOURNE U. L. REV., 1, 10-11.
146. Id.
147. Kinsella v. Russell Kinsella Pty. Ltd. (in liq), (1986) 4 N.S.W.L.R. 722, 733 (Austl.). Kinsella has recently been criticized and de facto rejected by the High Court of Australia in Spies v. The Queen, (2000) 201 C.L.R. 603 (Austl.) (holding that directors of a near-insolvent company do not owe creditors an independent fiduciary duty).
148. Nicholson v. Permakraft Ltd., [1985] 1 N.Z.L.R. 242 (N.Z.C.A.).
149. See Keay, supra note 144 (arguing that the insolvency duties should be triggered when there is a risk of insolvency).
150. See, e.g., Spies, 201 C.L.R. at 603 (holding that directors of a near-insolvent company do not owe creditors an independent fiduciary duty); Peoples Dep't Stores, Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461 (Can.) (finding no direct duty to creditors, although a duty of care is owed to all).
151. See Winkworth v. Edward Baron Dev. Co., (1987) B.C.L.C. 193, 197-98 (K.B.) (language suggesting a direct duty); Nicholson, 1 N.Z.L.R. at 242 (same); Jeffree v. Nat'l Cos. and Sec. Comm'n, (1989) 15 A.C.L.R. 217, 221 (K.B.) (same).
152. Walker v. Wimborne, (1976) 50 A.L.J.R. 446 (Austl.); see also David Thomson, Directors, Creditors, and Insolvency: A Fiduciary Duty or a Duty not to Oppress? 58 U. TORONTO. FAC. L. REV. 31, 38 (2000) (discussing the leading cases in common law jurisdictions).
153. Kinsella v. Russell Kinsella Pty. Ltd. (in liq), (1986) 4 N.S.W.L.R. 722, 730, 731 (Austl.).
154. Spies, 201 C.L.R. at 603.
155. Peoples Dep't Stores, 3 S.C.R. at 461.
156. Id. at 493.
157. Id. at 483
158. See, e.g., Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 790 n.56 (Del. Ch. 2004).
159. Donna W. McKenzie Skene, The Director's Duty to the Creditors of a Financially Distressed Company: A Perspective from Across the Pond, 2 J. BUS. & TECH. L. (forthcoming 2007) (manuscript at 4), available at http://digitalcommons.law.umaryland.edu/blc_2005/4/.
160. Id. Pari Passu is defined as "proportionally; at an equal pace; without preference." BLACK'S LAW DICTIONARY (8th ed. 2004). It prevents creditors from racing to the courthouse, since the order in which claims are brought will not affect their distribution in bankruptcy.
161. Jacob S. Ziegel, Corporate Governance and Directors' Duties to Creditors: Two Contrasting Philosophies, ANNUAL REVIEW OF INSOLVENCY LAW, supra note 135, at 133, 157.
162. See Prod. Res. Group, 863 A.2d at 790. I doubt the wisdom of a judicial endeavor to second-guess good-faith director conduct in the so-called zone [of insolvency]. Although it is easy to posit extreme hypotheticals involving directors putting cash in slot machines, the real world is more likely to generate situations when directors face a difficult choice between pursuit of a plausible, but risky, business strategy that might increase the firm's value to the level that equity holders will receive value, and another course guaranteeing no return for equity but preservation of value for creditors. Absent self-dealing or other evidence of bad faith, by what measure is a court fairly to critique the choice made through an award of damages? Id.
163. See Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Change of Control Transactions: Is There Any "There" There?, 75 S. CAL. L. REV. 1169 (2002) (describing how Delaware law leans toward the "social entity" school of thought, except in circumstances where Revlon duties are triggered). The entity school holds that "the corporate board of directors owes its duties to the corporation itself, rather than to the stockholders." Id. at 1171.
164. William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 CARDOZO L. REV. 261, 264 (1992) (describing the "social entity" theory of the corporation, which emerged over the last century).
165. See Henry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 GEO. L.J. 439, 440-41 (2001) (describing the shareholder primacy model); see also Strine, supra note 162, at 1170-71 (describing the "property" school of thought).
166. Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).
167. Id. at 507 ("[I]t is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.").
168. See Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1282 n.29 (Del. 1989) (holding that a board of a target company may consider the impact of the bid on other constituencies, "provided that it bears some reasonable relationship to general shareholder interests"); Revlon Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 176 (Del. 1986) (narrowing the Unocal holding by requiring that any consideration of non-shareholder interests be rationally related to a benefit accruing to the shareholders); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (holding that a board of directors may take into account the impact on constituencies other than shareholders when it decides whether to adopt a takeover defense).
169. Mills Acquisition Co., 559 A.2d at 1282 n.29. An exception arises when Revlon duties are activated, in which case directors must maximize shareholder value without regard to other stakeholder interests.
170. See, e.g., Paramount Commc'ns, Inc. v. Time, Inc., 570 A.2d 1136, 1140 (Del. 1990) (holding that Time and Warner may merge, even though a Time-Paramount merger would offer the shareholders a greater premium because, among other things, the Time directors made good faith and reasonable findings that Time's long-term value would be greater served by a merger with Warner).
171. Allen, supra note 162, at 265.
172. ABA Committee on Corporate Laws, Other Constituency Statutes: Potential for Confusion, 45 BUS. L. 2253, 2261 (1990) ("We believe the Delaware courts have stated the prevailing corporate common law in this country: directors have fiduciary responsibilities to shareholders which, while allowing directors to give consideration to the interests of others, compel them to find some reasonable relationship to the long-term interests of shareholders when so doing.").
173. Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 789-90 (Del. Ch. 2004).
174. Callison, supra note 133 (arguing that there should be no duty to creditors because creating a duty would impose unacceptable ambiguity upon directors).
175. Huff & Silberglied, supra note 8.
176. Credit Lyonnais Bank Nederland, N.V. v. Pathe Comm. Corp., No. 12150,1991 WL 277613, at *34 (Del. Ch. Dec. 30, 1991).
177. E. Norman Veasey, What Happened In Delaware Corporate Law And Governance From 1992-2004, 153 U. PA. L. REV. 1399, 1430 (2005).