The Board’s Duty to Keep Its Options Open

It is widely believed that large chapter 11 cases are now routinely handled via a quick 363 sale, followed by a not so quick liquidation of the residue of the debtor, along with a distribution of the sale proceeds. Indeed, commentators widely bemoan the fact that debtors arrive in chapter 11 with no choice but to do a quick sale because their lenders will not permit anything else. In this paper, Professor Lubben argues that the root of the issue lies in corporate governance, and not bankruptcy. If leaving debtors in chapter 11 only with the option to engage in a quick sale process is decidedly a problem, then that problem has its roots in nonbankruptcy corporate law. He argues that ultimately this is a question of state law fiduciary duties; the foundation for this duty already exists in the Delaware Supreme Court’s oft-maligned Omnicare, Inc. v. NCS Healthcare, Inc. In short, state corporate law imposes a duty on the board to carefully consider any decision that will foreclose a future board’s choices. In times of financial distress, this duty includes an obligationto carefully consider the effects of a particular decision on future restructuring options.

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