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be brought against them.95 Otherwise, a subsidiary board could not follow parental

direction without risk that the failure of the parent’s business strategy, and thus the

subsidiary, would later expose the subsidiary board to negligence-based liability for its

loyalty to the parent. A care-based claim premised on an act of fiduciary loyalty!

If there is conceptual room for equity in this context, that room is quite narrow. At

most, one might conceive that the directors of a wholly-owned subsidiary owe a duty to

the subsidiary not to take action benefiting a parent corporation that they know will

render the subsidiary unable to meet its legal obligations.96 Any lesser standard would

undercut the utility of the business judgment rule by permitting creditors to second-guess


The decision in

, 765 A.2d 910 (Del. 2000), does not aid the Litigation

Trust. That decision is controversial for several reasons, one of which is that it imposed

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    like duties on the board of a non-wholly owned subsidiary board with regard to a

merger in which the parent and the minority stockholders received identical consideration. Transactions where the minority receive the same consideration as the majority, particularly a majority entitled to sell its own position for a premium, had long been thought to fall within the

ambit of non-conflict transactions subject to business judgment rule protection.


, 283 A.2d 693 (Del. Ch. 1971); DAVID A. DREXLER, LEWIS S. BLACK, JR., & A. GILCHRIST SPARKS, III. DELAWARE CORP. LAW AND PRACTICE § 15.11, at 15-75 (2002). In any

event, what is critical here is that

does not purport to hold that the board of a wholly-

owned subsidiary must engage in a separate process of deliberation in order to consider whether a parent’s acquisition strategy is sound, even if that strategy requires financial support or other aid from the subsidiary.

96 In a recent decision, Judge Walsh of the District of Delaware Bankruptcy Court held that the directors and officers of a wholly-owned insolvent subsidiary owe a fiduciary duty to that

subsidiary and its creditors.

, 2006 WL 1731277, at *5. In that case,

the defendant directors of an insolvent subsidiary argued that they could not be held liable to the creditors of the subsidiary because they owed their duties solely to the parent corporation. The court rejected that argument and held that the plaintiff trustee had stated a claim for breach of fiduciary duties against the officers and directors. Judge Walsh explained that a director’s fiduciary duty to creditors is derivative of the duty owed to the corporation. As Professor Bainbridge notes, see note 88, the idea that the subsidiary directors could be exposed to a claim for breach of fiduciary duty in this context can be rationalized in traditional terms. If the firm is insolvent, its residual claimants are the creditors and it is for their benefit that the directors must now manage the firm. A purposeful fraudulent transfer to stockholders who are

“out of the money” is obviously inconsistent with the best interest of the creditors, the firm’s new residual claimants.


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