Director Liability: Wellspring Ruling, Director Releases, Duty of Loyalty During Restructuring

Description

The Delaware courts reached a decision in 2021 that veers from the most recent guidance on how Caremark is being interpreted. The decision in Wellspring is a cautionary tale for the fiduciaries of a distressed or potentially distressed corporation, particularly with respect to negotiations around release and/or indemnification provisions for those same fiduciaries.

Corporate counsel will need to advise directors and officers on how their activities may be evaluated against their duty of loyalty to the company. The decision in Wellspring is an important reminder for directors and officers as to how both process and substance matter in restructuring negotiations. Particularly where negotiations may involve releases, indemnification, or similar provisions, counsel must be conscious of the ever-present tendency for counterparties to exercise "20/20 hindsight." Wellspring reinforces the importance of disinterested governance and arm's length dealing with the restructuring process.

As to the need for independent directors, the company at issue had disinterested governance. The Wellspring decision is neither unique nor unusual. Corporate counsel will need to know how to engage with their clients and advise on negotiating any number of transaction alternatives and terms. But Wellspring may establish a precedent that undermines the ability to negotiate for what is customary and, indeed, necessary protections for corporate decisionmakers in those same transactions, such as releases, indemnity, or exculpation.

Listen as our expert panel discusses how corporate decisionmakers face choosing a path where outcomes are at best uncertain and how Wellspring and its evolution from Caremark guides how directors and officers need to comply with the duty of loyalty. The panel will address how Wellspring can help establish best practices for all corporate stakeholders regarding releases and anticipate future expectations and scrutiny of director and officer conduct.