## Facts

- Pathe Communications Corp. (PCC), controlled by Giancarlo Parretti, acquired MGM–Pathe Communications Co. (MGM) in a leveraged transaction financed largely by Credit Lyonnais Bank Nederland, N.V. (CLBN) and affiliates.
- MGM became financially distressed, and CLBN provided further financing while negotiating lender-protective governance arrangements.
- PCC entered into a Corporate Governance Agreement (CGA) and related voting arrangements giving CLBN significant control over governance, including rights tied to PCC’s pledged controlling MGM stock.
- PCC pledged its controlling block of MGM shares as collateral; after default, CLBN asserted it could vote those shares and reconstitute MGM’s board.
- CLBN alleged PCC and Parretti materially breached the CGA by interfering with MGM’s management and by nondisclosure or misrepresentation of certain financial arrangements.
- CLBN purported to remove Parretti-aligned directors (including Parretti, Maria Cecconi, and Yoram Globus) and install CLBN designees on MGM’s board.
- PCC disputed CLBN’s voting/control claims and attempted to remove CLBN’s designees and reinstate Parretti-aligned directors.
- The dispute proceeded as an expedited Delaware General Corporation Law § 225 action to determine MGM’s lawful board composition.

## Issues

1. Whether PCC and Parretti materially breached the CGA and related voting arrangements, triggering CLBN’s contractual rights to vote pledged shares and change MGM’s board.
2. Whether CLBN’s exercise of governance and voting rights (including director removals and appointments) was valid and enforceable under Delaware law in a § 225 proceeding.
3. What fiduciary considerations apply to directors when the corporation operates in the vicinity of insolvency, including whether directors may consider creditor and enterprise interests when making decisions.

## Decision

- The Court of Chancery determined that PCC and Parretti materially breached the CGA and related undertakings.
- The court enforced the contractual governance mechanisms, recognizing CLBN’s right to exercise the agreed voting rights associated with the pledged controlling block.
- The court confirmed CLBN’s ability to effect the contested director changes and validated the resulting MGM board composition asserted by CLBN.
- In discussing fiduciary duties in financial distress, the court stated that when a company is in the vicinity of insolvency, directors’ duties are not limited to advancing shareholder-only interests and may properly take account of the corporate enterprise and creditor interests.

## Legal Principles

- In a DGCL § 225 proceeding, the Court of Chancery’s function is to determine the corporation’s lawful directors; it may resolve necessary contract and statutory questions to decide board composition.
- Lender-negotiated governance and voting arrangements tied to pledged shares may be enforced when valid under Delaware law and triggered by material breach or default under the parties’ agreements.
- When a corporation operates in the vicinity of insolvency, directors may appropriately consider the interests of the corporate enterprise, including creditor interests, rather than acting solely to maximize short-term shareholder returns.
- Directors of a financially distressed company may favor value-preserving or creditor-protective strategies over speculative, equity-favoring risk shifts consistent with their fiduciary obligations to the corporation.

## Conclusion

The Court of Chancery enforced lender-protective governance agreements after finding material breach and confirmed the lender’s board control in a § 225 dispute, while articulating that directors of a firm near insolvency may consider the corporate enterprise and creditor interests when exercising fiduciary judgment.


Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., No. C.A. 12150, 1991 WL 277613 (Del. Ch. Dec. 30, 1991)