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Did the Delaware Supreme Court Break the 'Directors' Shield'?

By Jonathan P. Friedland and Russell C. Silberglied

Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., C.A. No. 12150, 1991 WL 277613 (Del. Ch. Dec. 30, 1991), stands for the proposition that directors and officers of a Delaware corporation that is either insolvent or in the 'zone of insolvency' owe fiduciary duties to creditors as well as stockholders. In essence, Credit Lyonnais provided a 'shield' to directors against shareholder suits alleging that directors breached their duties to shareholders by acting to protect creditors. Courts around the country have adopted this view, and attorneys have become accustomed to advising boards of directors based on the assumption that this is indeed the law.

The Delaware Supreme Court, in North American Catholic Educational Programming Foundation Inc. v. Gheewalla, 2007 Del. LEXIS 227 (Del. Supr. May 18, 2007), might have 'broken the shield.'

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