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Navigating Litigation Conflicts in Troubled Corporations

By Tamara Kurtzman
December 31, 2015

When a corporation finds itself in troubled financial waters, litigation by shareholders and creditors alike often follows. Increasingly, such litigation takes the form of a class action suit commenced against the company, followed closely by a derivative action against the directors and officers. In the context of derivative claims, a thorough understanding of both the duties of a corporation's officers and directors and to whom such duties are owed, is paramount. These dynamics, however, give rise to conflicts of interest that may pose significant ethical challenges for the attorneys representing the various parties.

Duties of Officers and Directors of Solvent Corporations

Under Delaware law, in the case of a solvent corporation, the duty of corporate directors is to maximize corporate value for the company's shareholders. To that end, corporate directors owe the corporation fiduciary duties of both care and loyalty. The duty of care mandates that directors be diligent in making decisions and in overseeing the corporation. Thus, for example, approval by directors of unreasonably high salaries to corporate officers in some circumstances may constitute a waste of corporate assets and thereby constitute a violation of the directors' duty of care. The duty of loyalty generally requires a director refrain from placing his or her own personal interests above the interests of the corporation. Accordingly, the duty of loyalty prohibits directors from unduly usurping corporate opportunities, competing with the corporation, and similar acts.

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