Appointment Of Independent Directors On The Eve Of Bankruptcy: Why The Growing Trend?

Regina Stango Kelbon, Michael DeBaecke, and Jonathan Cooper

The following is a summary of a paper prepared for the American Bar Association and later submitted to the Pennsylvania Bar Institute. The full article can be found at the link below.

Regina Stango KelbonMichael D. DeBaeckeJonathan CooperIn recent years, companies in financial distress have found “independent” directors to be useful to achieve protections for their board members. An independent director is a director – usually with no prior affiliation to the company – who has no personal interest or relationship that would render him or her incapable of acting solely in the best interests of the business. These individuals, typically selected on the basis of their business acumen and/or restructuring experience, bring not only expertise, but a desirable level of impartiality and objectivity to the corporate management scheme.

The appointment of an independent director can benefit a company in a number of ways, particularly when the business is struggling. From a practical standpoint, independent directors may be used for investigative purposes or to negotiate transactions involving insiders. The role of the independent director can mirror that of a bankruptcy examiner, a chief restructuring officer, or both, depending on the circumstances and strategic purposes.

Some companies have used independent directors in bankruptcy to stave off the appointment of an examiner or to derail a committee’s derivative standing to pursue litigation against corporate insiders.

Additionally, the presence of properly functioning independent directors can make it more difficult for a plaintiff shareholder to establish breach of fiduciary duty claims against the company and the board members. Under the typical business judgment rule, a board’s decisions are presumed reasonable and the burden to prove a breach of duty rests with the plaintiffs. In “conflict” situations, such as when a director or controlling shareholder stands on both sides of a deal, a more onerous standard (entire fairness review) may be triggered.

The presence of independent directors may afford the directors the business judgment presumption and/or allow the ultimate burden of proof to remain with the plaintiffs.

This article examines the fiduciary duties of directors and how independent directors have been used in certain bankruptcies.

“Appointment Of Independent Directors On The Eve Of Bankruptcy: Why The Growing Trend?” was formerly prepared and published in connection with the American Bar Association Business Law Section Spring Meeting held in Los Angeles, California, April 10-12, 2014. To read the full article, please click here.