As many practitioners know, the Gheewalla case represented an important transition in corporate fiduciary principles from prior Delaware jurisprudence. Among other things, the Delaware Supreme Court established in that case that (i) there is no “zone of insolvency” under Delaware law – up to the point of actual insolvency, the stockholders are the sole residual claimants of the corporation’s value; (ii) upon insolvency, the creditors preempt the stockholders as the primary residual claimants, although stockholders retain a secondary status in that capacity; and (iii) the board of directors’ fiduciary duties are owed to the corporation, qua corporation, not to the residual risk-bearers, albeit for their indirect benefit.
Prior to Gheewalla, the conundrum had been that the divergent interests of creditors and stockholders left corporate directors of insolvent companies in a decision-making lurch insofar as their discretion to pursue high risk, value-maximizing strategies was concerned. To the extent that the benefits of such transactions might inure disproportionately to one group of residual claimants (stockholders) at the expense of other residual claimants (creditors), the board would be loath to pursue certain transactions for fear of derivative fiduciary claims from creditors.
In the recent Quadrant case, the Chancery court has appeared to lay that concern to rest – in a big way. In Quadrant, the Delaware Court of Chancery held that the business judgment rule continues to apply to board decisions post-insolvency even if the board is not disinterested and even if the transactions at issue may have a disproportionately beneficial effect to shareholders at the creditors’ expense, as long as the board’s decisions are reasonably intended to maximize the benefit to the corporation as a whole.
The full text of the decision can be read here: http://courts.delaware.gov/opinions/download.aspx?ID=212670