Six Considerations For Directors Navigating Distressed M&A

When a company faces financial distress or insolvency, its board of directors faces heightened scrutiny. Actions taken during this critical period are more likely to be second-guessed in hindsight by creditors, shareholders, and courts. Observing proper fiduciary duties and following appropriate governance processes are particularly important in distressed M&A transactions.

The following considerations can help directors balance stakeholder interests while minimizing legal exposure and maximizing enterprise value in distressed transactions.

1. Understand Fiduciary Duties and Maximize Enterprise Value

Directors of insolvent companies or those operating in the "zone of insolvency" remain subject to the same fundamental fiduciary duties as directors of solvent corporations: care, loyalty, and good faith. However, directors of an insolvent company must also consider creditors' interests because creditors become the residual beneficiaries and may gain standing to