Overnight, seemingly-healthy companies have seen their business models collapse, revenues evaporate, cash reserves dwindle, and valuations impaired. Some corporate boards, which in recent memory have focused almost exclusively on capital raising and unprecedented expansion, are confronting financial distress, many for the first time. While the “business judgment rule” and “entire fairness standard” are familiar concepts to most directors, it is important at this time to revisit both in the context of financial distress. This article will revisit the “business judgment rule” in the context of companies that are insolvent or operating in the zone of insolvency. It also will provide a short primer on the “entire fairness doctrine,” which demands that transactions that purport to transfer the value of an insolvent corporation to a controlling shareholder or related party must be inherently fair to the residual claimants, by both demonstrating fair dealing (i.e., process) and fair price (i.e., substance).
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