This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is a pattern that shows up in the back half of a lot of venture-backed company sales. The lender is watching covenants break every quarter. The preferred stockholder has a liquidation preference sitting somewhere north of the whole enterprise value. The founder-CEO still believes the company is worth three times what any buyer will pay. And the board keeps meeting, keeps looking at indications of interest, and keeps deciding that the next bid will be better than this one.
Eventually a lender in that position starts asking a question that sounds obvious and turns out not to be: if this company is insolvent and I am the one whose money is actually at risk, do I get to tell the board how to run the sale?
The Delaware Court of Chancery gave a fairly emphatic answer in CIBC Bank USA v. Barker, C.A. No. 2024-0978-LWW (Del. Ch. May 29, 2026), a memorandum opinion by Vice Chancellor Will. The answer is mostly no — and the reasoning is worth understanding before anyone drafts another credit agreement or another preferred stock certificate of designations.
The board did not owe the lender a liquidation
The nominal defendant, BERA Brand Management, Inc., was a Delaware software-as-a-service company that had posted three consecutive years of negative EBITDA and lost roughly a third of its customer accounts. A private equity fund had put more than $25 million in for a 26.6% stake, and its shares carried a liquidation preference entitling it to at least three times original issue price on a sale or liquidation. The lender held a security interest in substantially all assets and had been living with acknowledged events of default since 2019.
When the sale process finally ran, it produced a $7 million written offer from a strategic buyer. The board deadlocked over it. Some directors thought the offer was too low because it would not clear the preference. The CEO would not support it unless he retained additional equity or took personal proceeds. The process stalled, the lender ran an Article 9 foreclosure sale, and the assets went for roughly $650,000 against more than $7 million of debt.
The lender sued, and its central theory was intuitive: the preferred stack was so far underwater that common was hopelessly out of the money, so a board holding out for a price that cleared the preference was chasing a windfall for equity at the expense of the enterprise. Chancery rejected that framing. Even accepting that the board wished to clear the preference to generate a return for junior stockholders, the court wrote, “that goal aligns with maximizing BERA’s value.”
That sentence carries a lot of weight. It says that a liquidation preference is not a conflict to be managed away — it is a target that happens to point in the same direction as enterprise value. A board that pushes for a higher price is doing the thing creditors would want done, even when the board’s motive is to rescue equity. The court paired that with the settled rule from Trenwick America Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006), that there is no absolute obligation on the board of a company unable to pay its bills to cease operations and liquidate, and with Quadrant Structured Products Co. v. Vertin, 102 A.3d 155 (Del. Ch. 2014), which held that the board of an insolvent corporation was not required to manage toward a near-term dissolution for the benefit of creditors.
The doctrinal core, stated flatly: the business judgment rule applies equally to directors of solvent and insolvent corporations, outside of bankruptcy proceedings. Insolvency does not swap out the standard of review. It swaps out who has standing to complain.
Insolvency moves the plaintiff, not the pleading burden
Which brings up the part of the opinion that will matter most to lenders drafting today. Under North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), a creditor of an insolvent corporation has standing to bring derivative — not direct — fiduciary duty claims. Chancery confirmed the lender’s claims here were derivative, because the alleged harm was the company’s own lost enterprise value and any recovery would flow to the company first. Corporate insolvency, the court explained, and the reality that a creditor may ultimately capture the recovered funds, does not transform a derivative claim into a direct one.
Standing, though, is the easy part. Derivative standing carries Court of Chancery Rule 23.1 with it, and Rule 23.1 requires particularized pleading of demand futility. The lender argued that creditors should get a relaxed version of that burden — the theory being that a creditor lacks the Section 220 books-and-records tool a stockholder would use to build a particularized complaint, and lacks the informational access to plead what individual directors knew and did.
The court was not persuaded, and the reason it gave is the one that should change how credit agreements get negotiated. Commercial lenders can protect themselves by contract, and this one had — it bargained for extensive information rights. “There is no textual basis for exempting creditors from Rule 23.1’s stringent pleading requirements,” the opinion says, and the same-standard holding follows from Section 141(a) itself, which does not distinguish between stockholders, creditors, or other corporate constituencies.
So the creditor arrives at the courthouse with standing and immediately runs into a pleading standard built for stockholders who have inspection rights the creditor does not have — and the court’s answer is that the creditor should have negotiated for better information rights, or used the ones it had. That is a contract-drafting instruction dressed as a procedural holding.
Group pleading fails, and exculpation does most of the work
The demand analysis then collapsed for a reason that recurs in Delaware derivative practice. The company had a Section 102(b)(7) exculpatory charter provision, and the plaintiff had disclaimed both enhanced scrutiny and any oversight-based theory. That left bad faith as the only route to a substantial likelihood of liability — an intentional dereliction of duty, a conscious disregard of a known duty to act, not merely a decision the plaintiff would have made differently.
Against that standard, the complaint’s allegations about the non-management directors were made on information and belief and addressed the directors collectively. Chancery has been consistent that this does not work; the opinion cites In re ProAssurance Corp. Shareholder Derivative Litigation, 2023 WL 6426294 (Del. Ch. Oct. 2, 2023), for the proposition that a generalized group-pleading allegation about “all” directors falls well short of Rule 23.1’s particularity standard. Even the one director-specific allegation — that the lender had warned a director the CEO’s backchannel negotiations were putting the sale at risk — was held to describe, at worst, an exculpated breach of the duty of care.
Note the asymmetry that produced. The CEO’s conduct, as alleged, was genuinely bad: contacting the winning bidder on the eve of the foreclosure auction to propose his own investment at a far higher valuation, and threatening to move customer contracts and employees to an entity he controlled. None of that saved the derivative claims, because demand futility turns on the directors who would evaluate the demand, not on the wrongdoer. But it is exactly what kept the one surviving count alive: the tortious interference claim against the CEO personally, where the court found it reasonably conceivable that his predominant motive was self-enrichment and that the stranger doctrine therefore did not shield him. A fiduciary who acts solely to advance his own financial interest steps outside his corporate authority and becomes, for interference purposes, a stranger to his own company’s contracts.
What a lender should actually do differently
Read as a drafting memo rather than a case note, Barker suggests four moves.
First, information rights are litigation rights. The court expressly treated the lender’s bargained-for information covenants as the answer to its complaint about pleading disadvantage. That means the observer seat, the board-materials delivery covenant, and the right to receive minutes are not just monitoring tools — they are the raw material of a particularized complaint later. A covenant that delivers financial statements but not board packages leaves the lender exactly where this one ended up.
Second, if the concern is that a board will hold out for a price that clears a preference, the fix is a contractual milestone, not a fiduciary theory. Forbearance agreements can set a marketing deadline, a minimum-bid acceptance mechanic, and a consequence for missing it. This lender did set an October deadline and then extended past it more than once. The extensions were commercially reasonable and legally costly.
Third, the person most likely to blow up a distressed sale is the founder-CEO with equity that is underwater, and the claim most likely to reach him is not a fiduciary claim. It is tortious interference — which the lender, as a party to the credit and forbearance agreements, could bring directly and did not have to plead through Rule 23.1 at all. Preserving that path means keeping the contractual relationships clean and documenting interference when it happens.
Fourth, on the equity side, this is a reminder that a liquidation preference does not create a fiduciary conflict that a court will police. Investors who want the board to be steerable in a downside sale need protective provisions and a consent right that says so, not a preference and a hope. We have written before about how preferred protective provisions function as a practical veto over a founder’s sale decision, and the same drafting instinct applies in reverse when the company is heading for the exit at a loss.
One Florida footnote. Most of this analysis assumes a Delaware entity, and Gheewalla‘s derivative-only rule is Delaware law. A Florida lender facing a Florida corporation or LLC that has run out of runway often lands somewhere else entirely — in an assignment for the benefit of creditors under Chapter 727, where the assignee runs the sale and the fiduciary questions get restructured around the assignment rather than the board. Knowing which of those two worlds a distressed deal is heading into changes what the lender should be negotiating for months earlier.
The broader point is that Delaware has now said the quiet part clearly. Insolvency gives creditors a seat at the litigation table. It does not give them a better chair, a lower pleading standard, or a veto over a board that would rather try to sell the whole company than liquidate it. For more on how these questions play out across a transaction, see our overview of mergers and acquisitions practice. The full opinion is available from the Delaware Courts opinion archive.
If you are a lender, a preferred investor, or a director navigating a sale process at a company that is running out of room, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
