Given the uncertainty of the effects of this pandemic on markets and industries in the U.S. and around the world, many businesses are now confronting significant and unique challenges which are causing financial distress among otherwise healthy companies. Various federal, state and local government orders restricting travel, closing schools, and closing or limiting the operations of certain businesses, and just today the announcement by many carmakers including the Detroit 3 that they are suspending operations through at least March 30th, have combined to create great uncertainty and, in some cases, a zone of insolvency, for many businesses. The overview below provides guidance to directors and officers of companies operating in the zone of insolvency.
Zone of Insolvency
Because the range of persons and entities who could claim to be beneficiaries of an officer or director's fiduciary duties to the corporation changes once an entity is insolvent, the "zone" really describes a situation in which there is a risk of becoming insolvent. As a result, the risk of having an additional constituency as the beneficiary of the fiduciary duties (that is, the creditors, ahead of the shareholders) must be taken into consideration.
A. Duty of care
B. Duty of loyalty
Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries.
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