Credit Lyonnais Bank Nederland, N.V. v. Pathe Communs. Corp. - Civil Action No. 12150, 1991 Del. Ch. LEXIS 215 (Ch. Dec. 30, 1991)

Rule:

At least where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residue risk bearers, but owes its duty to the corporate enterprise.

Facts:

Credit Lyonnais Bank Nederland ("CLBN" or "the Bank") provided financing in a leveraged buyout of MGM-Pathe Communications Co. ("MGM"). The bank brought suit under Del. Gen. Corp. Law § 225, alleging that the directors failed to make accurate financial disclosures in connection with the leveraged buyout and that the defendants, MGM’s parent corporation and three individuals, breached the governance agreement by defaulting on loans made to the parent corporation that were secured by stock in the parent's controlling block of the subsidiary's stock. The bank claimed that it was the legal registered owner of that controlling stock and sought a judicial declaration of the validity of its action in replacing defendants and an injunction specifically enforcing the corporate governance agreement and enjoining future violations. Defendants claimed that the bank's actions were a material breach or repudiation of its obligations and claimed that defendants could then freely exercise their right to remove the directors established by the bank.

Issue:

Under the circumstances, did the defendants breach the corporate governance agreement?

Answer:

Yes.

Conclusion:

The court held that defendants' failure to make accurate financial disclosures at the time the agreement was executed constituted bad faith and a material breach of the corporate governance agreement. According to the court, the omission or misstatement of an item in a financial report was material if in the light of surrounding circumstances, the magnitude of the item was such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item. In light of the circumstances, the court found in favor of the bank and held that the bank was legally entitled to exercise its rights under a voting trust agreement.