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The duties of private equity directors of distressed companies: avoiding an intrinsic fairness review.

Article Excerpt
When times are good, the goal of private equity professionals serving as directors of portfolio companies is relatively straightforward-maximization of value for the corporation's shareholders. Moreover, the interests of the two constituencies that the private equity professional serves--his private equity firm employer and the portfolio company's shareholders--are typically aligned as the private equity firm is usually the portfolio company's largest shareholder.

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When a portfolio company becomes insolvent, however, the legal standard by which the actions of a private equity professional serving on its board are judged may be materially more demanding. Private equity professionals serving as directors of portfolio companies during the current economic downturn should therefore understand the duties they owe to the stakeholders in the corporations they serve and the impact of the corporation's financial condition on these obligations.

Directors typically owe the corporation and its shareholders a duty of care and a duty of loyalty. The duty of care requires that directors exercise the degree of care that an ordinary and prudent person would use in similar circumstances. The duty of loyalty requires that directors act in good faith in the best interests...

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