In the landmark case of BTI 2014 LLC v Sequana SA, the Delaware Court of Chancery made a significant ruling that will have far-reaching implications for corporate governance. The court's decision centered around the fiduciary duties of directors in the context of a going-private transaction.
The case involved Sequana SA, a French company, and its efforts to acquire a US-based company, Rhone, through a going-private transaction. The transaction was structured as a merger, with Sequana acquiring all of Rhone's outstanding shares. The court's decision was a result of a dispute over the fairness of the transaction.
The Delaware Court of Chancery ultimately ruled in favor of Sequana, finding that the company's directors had fulfilled their fiduciary duties in the transaction. The court's decision was based on the company's ability to negotiate a better price for the transaction, which was achieved through a combination of cash and stock.
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Court Ruling
The Supreme Court's judgment in BTI 2014 LLC v Sequana SA was handed down on 5 October 2022.
The Supreme Court considered the circumstances in which company directors must exercise their duties under s.172 Companies Act 2006 (CA06) with regard to the interests of the creditors and affirmed the position reached by the Court of Appeal.
Directors must take legal advice on whether and when they must exercise their duties with regard to the interests of creditors, as there is no one definitive "trigger point".
The Supreme Court outlined four issues which it considered when making the Judgment, including whether there is a common law creditor duty at all.
The Supreme Court held that there was a creditor duty supported by case law and s.172(3) CA06, noting that a creditor's economic interest increases when a company is insolvent or nearing insolvency.
Directors should take a creditor's interest into account and avoid prejudicing it when a company is insolvent or nearing insolvency.
In its Judgment, the Supreme Court confirmed that directors' fiduciary duty to act in the company's interests has to reflect the fact that both shareholders and creditors have an interest in the company's affairs.
Directors should have regard to the interests of the company's general body of creditors, as well as to the interests of the general body of shareholders, and act accordingly.
The Supreme Court held that the duty to consider creditors' interests arises when directors know, or should know, that the company is insolvent or bordering on insolvency or that insolvent liquidation or administration is probable.
However, the Court left open the question of whether it is essential that the directors know or ought to know that the company is insolvent or bordering on insolvency or that an insolvency process is probable.
Ruling Implications
The Supreme Court's judgment provides clarity on the framework for directors to make decisions in uncertain economic times. This is particularly important given the current economic climate in the UK.
Directors and their advisors now have a clearer understanding of when creditors' interests become paramount. This is at the point where insolvent liquidation or administration is inevitable.
The Supreme Court recognized the need to support a rescue culture and the burden on directors if an earlier trigger point was adopted. This means that directors are given some flexibility in making decisions.
Shareholders retain a valid economic interest prior to the point where creditors' interests become paramount. This is because there is still a potential for the company to be rescued.
The Supreme Court noted that this area of law is still developing and may require further clarification through future appeals. This is because much of their commentary was obiter dicta, or observations rather than legal rulings.
Update on Sequana
The UK Supreme Court's decision in BTI v Sequana has clarified how directors should comply with their duties to creditors. This is a welcome development for businesses and individuals involved in insolvency law.
The court ruled that directors have a duty to have regard to the interests of creditors, and this duty is preserved by s 172(3) of the Companies Act 2006. This means that directors must consider the impact of their decisions on creditors when making financial decisions.
A key point from the judgment is that the duty to consider creditors' interests is part of the directors' fiduciary duties to act in good faith for the benefit of the company. This means that directors must prioritize the interests of the company, which now includes the interests of creditors as a body.
The court also clarified that the duty to consider creditors' interests is triggered when the company is insolvent or bordering on insolvency. A "real risk of insolvency" is not enough to trigger the duty.
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