Delaware Chancery Update: Director and Creditor Liability in Distressed Companies

On November 15, 2024, the Delaware Court of Chancery found that certain of the directors of Bridge Street Worldwide, Inc. ("BSW"), a Delaware corporation, were liable for breaching their fiduciary duty of loyalty by entering into a forbearance agreement with BSW's creditor, Domus BWW Funding LLC ("Domus"), a subsidiary of Versa Capital Management, LLC ("Versa"). The court held that the directors approving the forbearance agreement were materially interested in the transaction due to the creditor agreeing to indemnify the directors in the face of substantial litigation risk and that the transaction was not entirely fair to BSW or its stockholders. The court went on to find that Versa and Domus aided and abetted BSW's directors' breach of their duty of loyalty because the creditor parties knew of the substantial litigation risk BSW's directors were facing and exploited BSW's directors' fear of litigation by offering indemnification to finalize the forbearance transaction.

This case highlights that directors of Delaware corporations should always remain aware of their fiduciary obligations and consider whether the prioritization of certain objectives in negotiations-including indemnification, D&O insurance coverage and releases-may lead to a finding that those directors were self-interested, and cause the transaction to be evaluated under an entire fairness standard. Additionally, this case emphasizes that where a creditor has knowledge of a director's potential conflict of interest and exploits that conflict for its own benefit, such a creditor may be found liable for aiding and abetting liability.

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