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With respect to the business judgment rule, the Court said that to invoke its protections "’directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them.’" If directors fail to do so, then a court will scrutinize the challenged transaction under the "entire fairness" standard of review.
The complaint had alleged that the director and officer defendants had approved an uninformed fire sale of the company’s assets because they had not hired an investment banker to shop the deal or value the assets, they had not obtained a fairness opinion, and they failed to seek offers from other purchasers.
Within 72 hours of commencing work, the restructuring advisor determined to sell the company’s assets.
However, instead of hiring an investment bank and commencing a competitive bidding process, the complaint alleged that the restructuring advisor immediately continued the sale process with CDW and reached a handshake deal with CDW on September 2, 2003.
As a result, the defendants lost the protection of the business judgment rule.
In late August 2003, the company formally retained a restructuring advisor and appointed him to the position of Chief Operating Officer.The United States Bankruptcy Court for the District of Delaware recently issued a memorandum opinion in which it refused to dismiss breach of fiduciary duty claims against corporate directors who approved the sale of a financially distressed company’s assets on the eve of bankruptcy. The Court’s opinion sheds light on directors’ duties, and what they can and should do to protect themselves from liability, in such situations.In , a bankruptcy liquidating trust filed a complaint against the officers and directors of the debtor, traded as “Micro Warehouse,” alleging that they breached their duties to the company, its shareholders and its creditors in connection with a sale of the company’s assets.Specifically, the Court said, "the allegations support the claim that the D&O Defendants breached their fiduciary duty of loyalty and failed to act in good faith by abdicating crucial decision-making to [the restructuring advisor], and then failing adequately to monitor his execution of the ‘sell strategy,’ resulting in an abbreviated and uninformed sale process; and approving the sale to CDW for grossly inadequate consideration." The defendants argued that the breach of duty of care claim must fail because of the exculpation provision in Micro Warehouse’s certificate of incorporation and the business judgment rule.The Court again disagreed, noting that "'[w]hen a duty of care breach is not the exclusive claim, a court may not dismiss [the duty of care claim] based upon an exculpatory provision.’" Therefore, because the liquidating trust had alleged facts supporting a claim for breach of the duty of loyalty as well as lack of good faith, the exculpatory provision was not cause to dismiss the duty of care claim.
In particular, plaintiffs will be sure to allege any facts they can to support the inference that officers and directors abdicated their responsibilities and failed to inform themselves of material facts before making decisions.