"Quadrant v. Vertin: Creditors Beware – Fiduciary Duty Protections Not as Protective as Some May Think"

On October 1, 2014, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued an opinion in the Quadrant Structured Products Company, Ltd. v. Vertin case that highlights certain limits on the protections fiduciary duties provide to creditors of an insolvent corporation when its board of directors engages in transactions that have the practical effect of transferring value to the corporation's controlling stockholder. 

In Quadrant, the Vice Chancellor held that a board of directors' decision that appears rationally designed to increase the value of an insolvent corporation as a whole and does not confer direct and specific benefits to the insolvent corporation's controlling stockholder will be protected by Delaware's lenient business judgment rule even if the business decision is a high risk business strategy that benefits the controlling stockholder more than the corporation's creditors. 

This Stroock Special Bulletin looks at the Quadrant case, which calls into question the protections some creditors may have thought they were receiving from fiduciary duties owed to an insolvent corporation and underscores the need for creditors to protect themselves in their financing documents.