Avoiding Independent Director Challenges In Ch. 11 Litigation

In the realm of bankruptcy proceedings, the appointment of independent directors has become an increasingly common practice. These directors, often with expertise in restructuring and corporate governance, are tasked with overseeing investigations, negotiating transactions, and generally safeguarding the interests of creditors and other stakeholders. However, concerns have arisen regarding the true independence of these directors, particularly in light of their potential ties to the debtor or its affiliates.

The recent bankruptcy case of Purdue Pharma, the pharmaceutical company at the center of the opioid crisis, exemplifies the challenges surrounding director independence. In this case, a special committee of purportedly independent directors was appointed to oversee the company's restructuring plan. However, the independence of this committee was challenged, leading to the appointment of an examiner to investigate their actions.

This incident underscores the need for greater transparency and scrutiny when evaluating director independence in bankruptcy cases. To address these concerns, I propose a set of enhanced disclosure requirements for independent directors, enabling bankruptcy courts and creditors to make informed assessments of their true independence.

Proposed Disclosure Requirements for Independent Directors

1. Identification of Nominators: Require independent directors to disclose the identity of the person or entity responsible for their appointment. This information is crucial in identifying potential conflicts of interest and assessing the director's true independence.

2. Relationships with Debtor's Professionals: Disclose any prior or existing relationships with the debtor's counsel, financial advisors, or other professionals involved in the bankruptcy case. Such relationships could raise concerns about the director's ability to objectively evaluate the actions of these professionals.

3. Previous Board Memberships: Provide a detailed list of all companies where the independent director currently or previously served on the board, along with any companies where a member of the debtor's board also served or serves. This information helps identify potential conflicts of interest arising from cross-board memberships.

4. Experience in Bankruptcy Cases: Disclose any prior experience serving as a financial advisor, chief restructuring officer, litigation trustee, liquidation trustee, disbursing agent, or other expert or agent in bankruptcy cases. This information is relevant in assessing the director's expertise and potential biases.

5. Counsel and Financial Advisor Selection: Clarify whether the independent director or the special committee they serve on will have the authority to appoint independent counsel and financial advisors separate from the debtor's professionals. This independence is crucial for ensuring objective investigations and negotiations.

6. Relationships with Principal Equity Holders and Creditors: Disclose any relationships with principal equity holders or principal creditors of the debtor, as well as any relationships with principal stockholders or creditors of other companies where the independent director currently or previously served on the board. Such relationships could compromise the director's objectivity.

   
   

By implementing these enhanced disclosure requirements, bankruptcy courts and creditors can gain a clearer understanding of the true independence of directors, fostering greater confidence in their ability to act in the best interests of all stakeholders. This enhanced transparency will also serve as a deterrent to potential conflicts of interest and ensure that independent directors uphold their fiduciary responsibilities.

In conclusion, the appointment of independent directors in bankruptcy cases should not be a mere formality. By implementing stricter disclosure requirements and carefully evaluating the independence of these directors, we can safeguard the interests of creditors and other stakeholders while promoting fair and transparent bankruptcy proceedings.