On that basis, the court
claims on the basis that
Southwest could not
assert a fiduciary-breach
claim against its directors and officers. 22
Another bankruptcy court soon criti-
cized the Southwest decision. 23 That court
held that sole-ownership status did not
affect the fiduciary duty of a subsidiary’s
directors and officers. 24 It explained that it
would be “absurd” if fiduciary duty was
fundamentally different merely because an
entity was wholly owned. 25 It explained that
any duty that directors and officers owe to
owners (whether single or multiple) is indi-
rect; it is “derivative of the duties owed” to
the company. 26 Whether a business is sol-
vent or not, whether it is wholly owned or
not, directors and officers always “have the
task of attempting to maximize the eco-
nomic value of the firm.” 27
The court in Southwest accepted the criticism in In re Scott and reversed its dismissal
of the fiduciary-duty claims.28 It explained
that Delaware law “impose[s] fiduciary
duties on the officers and directors of a
wholly owned subsidiary that run directly
to the subsidiary itself, and not only to its
sole shareholder.” 29 Even that was not quite
right. It would have been more correct to
hold that direct fiduciary duties run to the
To hold otherwise, the
Southwest court explained,
would lead to the “absurd”
result that fiduciary duties
would materially change if
the ownership of just a single
share of a subsidiary’s stock
were transferred to someone
other than the parent. 30 To
hold otherwise, it explained
further, “would mean that
… the corporation itself cannot sue for breach of fiduciary duties if
it happens to be wholly owned, though it
would have such a cause of action if just
one share of its stock were owned by someone other than the parent.” 31 Were it otherwise, directors of wholly owned companies
would need to ascertain whether any stock
had been sold every time they were about
to make a decision that might benefit the
parent more than the subsidiary.
There are important lessons to learn from
Southwest. Chief among them, where a
company fiduciary self-deals for profit,
equitable tolling can keep claims for fiduci-
ary breach viable for years, as was done in
Southwest. To avoid some of that risk, a
transfer of ownership of the company
should disclose such transactions and
include a release or indemnification of all
such claims. But bear in mind that insol-
vency and subsequent bankruptcy can
result in a change of ownership where there
is no opportunity to obtain such a release
or indemnification. If the company goes
into bankruptcy, a trustee could assert
fiduciary-breach claims against officers and
directors who took pre-petition actions that
benefited the former owner prior to the
detriment of the debtor.
Owners, officers and directors of closely
held companies should not be misled by
judicial language that suggests they can
manage a company for the benefit of the
owner. To the contrary, whether a company
is solvent or not, whether it is wholly
owned or not, they must manage it for the
good of the company itself. If they fail
to do so, if they have the company make
transactions that benefit themselves to the
company’s detriment, a bankruptcy trustee
could make a viable claim for fiduciary
breach many years later.
1. Collins v. Kohlberg & Co. (In re Southwest Supermarkets LLC), 325
B.R. 417, 424 (Bankr. D. Ariz. 2005).
3. Id. at 424.
4. Collins v. Kohlberg & Co. (In re Southwest Supermarkets LLC), 315
B.R. 565 (Bankr. D. Ariz. 2004).
5. Id. at 575 (emphasis added).
7. Id. at 575-76.
8. Production Res. Group v. NCT Group, Inc., 863 A.2d 772, 791
(Del. Ch. 2004).
10. In re Trados Inc. S’holder Litig., 73 A.3d 17, 36 (Del. Ch. 2013)
(quoting N. Am. Catholic Educ. Programming Found. Inc. v.
Gheewalla, 930 A.2d 92, 99 (Del. 2007)).
11. Production Resources Group LLC v. NCT Group Inc., 863 A.2d
772, 790-91 (Del. Ch. 2004).
12. Geyer v. Ingersoll Publ’ns Co., 621 A.2d 784, 787 (Del. Ch.
13. See Emerald Partners v. Berlin, 787 A.2d 85, 92 (Del. 2001)
(“there is no safe harbor for divided loyalties in Delaware.”)
(internal quotation and alteration marks omitted).
14. In re Trados, 73 A.3d at 36-37 (emphasis added).
15. Gheewalla, 930 A.2d at 103.
16. 545 A.2d 1171, 1174 (Del.1988).
17. Id. at 1172 (emphasis added).
20. See In re MFW S’holders Litig., 67 A.3d 496, 521 (Del. Ch. 2013)
(cautioning that “broad judicial statements, when taken out of
context, do not constitute binding holdings”).
21. Southwest, 315 B.R. at 575 (emphasis added).
22. Id. at 576.
23. Claybrook v. Morris (In re Scott Acquisition Corp.), 344 B.R. 283
(Bankr. D. Del. 2006).
24. Id. at 286.
25. Id. at 287.
26. Id. at 288.
27. Production Resources, 863 A.2d at 791.
28. Collins v. Kohlberg & Co. (In re Southwest Supermarkets LLC),
376 B.R. 281, 283 (Bankr. D. Ariz. 2007).
30. Id. at 285.
Where a company fiduciary
self-deals for profit,
equitable tolling can keep
claims for fiduciary breach
viable for years.
Fiduciary Duty and the Wholly Owned Company