PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022
MEMORANDUM
April 12, 2023 Matter No. 1012-00002
TO: Board of Directors, Stonefield Logistics Group Inc.
Marcus Delano, Chief Executive Officer and Director Julian Voight, Managing Director, Ridgeline Capital Management III LLC; Board Designee Serena Chu, Principal, Ridgeline Capital Management III LLC; Board Designee All Other Current Directors
FROM: Nathan Ikeda, Associate, Bankruptcy & Restructuring Group
REVIEWED BY: Nathaniel Bower, Partner, Bankruptcy & Restructuring Group
RE: Fiduciary Duties of Directors of Stonefield Logistics Group Inc. in the Zone of Insolvency — Analysis and Governance Recommendations in Connection with Contemplated Restructuring Alternatives
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I. Executive Summary
The purpose of this memorandum is to advise the Board of Directors (the "Board") of Stonefield Logistics Group Inc. ("Stonefield" or the "Company"), a Delaware corporation headquartered at 4200 Commerce Street, Suite 1500, Dallas, TX 75201, regarding the fiduciary duties applicable to directors when the Company is in or approaching the "zone of insolvency" under Delaware law. This memorandum is prepared in connection with the Board's evaluation of restructuring alternatives and is intended to provide a comprehensive legal framework to guide the Board's deliberations and decision-making throughout the restructuring process.
The Company is a portfolio company of Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or the "Sponsor"), having been acquired by Ridgeline through a leveraged buyout in December 2017. At this time, the Company faces severe and escalating financial distress, the principal dimensions of which are summarized below:
• Debt Load. Total funded debt stands at approximately $475.1 million, comprising $42.0 million drawn on a $50.0 million revolving credit facility, $285.0 million in first lien Term Loan B obligations, $140.0 million in 11.50% Senior Secured Second Lien Notes, and approximately $8.1 million in accrued payment-in-kind ("PIK") interest on the mezzanine notes.
• Earnings Deterioration. Last-twelve-months ("LTM") Adjusted EBITDA as of Q1 2023 has declined to $41.2 million, reflecting a sharp contraction from fiscal year 2022 Adjusted EBITDA of $58.7 million. Management projects further erosion to approximately $38.5 million for fiscal year 2023.
• Excessive Leverage. Total leverage stands at approximately 11.5x LTM Adjusted EBITDA. First lien leverage alone is approximately 7.9x, calculated as $327.0 million of first lien funded debt divided by $41.2 million in LTM Adjusted EBITDA.
• Critical Liquidity. Total available liquidity is only $15.8 million, consisting of $11.3 million in unrestricted cash and $4.5 million in revolver availability (net of $3.5 million in outstanding letters of credit).
• Cash Burn. The Company is consuming approximately $2.5 million per month in cash, and absent a restructuring or other intervention, liquidity is projected to be exhausted by the third quarter of 2024.
• Maturity Wall. The Company faces a near-term maturity wall, with $327.0 million in first lien debt (revolver and Term Loan B) maturing on December 15, 2024.
In light of these financial circumstances, the Company is evaluating a consensual out-of-court restructuring that would involve an amend-and-extend of the first lien credit facilities, a new-money super-priority facility to provide incremental liquidity, and an equitization of the mezzanine debt. The Board has engaged Calderwood & Harkness LLP as restructuring counsel and Hargrove Advisory Group LLC as financial advisor to assist in this process. A Chapter 11 filing remains available as a fallback alternative if a consensual transaction cannot be achieved.
Based on our analysis, and as discussed in greater detail below, we conclude that the Company's financial condition places it squarely in or approaching the "zone of insolvency" under Delaware law. While the Delaware Supreme Court's decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), clarified that fiduciary duties do not formally shift to creditors in the zone of insolvency, the Board should, as a matter of sound governance and litigation risk management, be mindful that creditor interests become increasingly relevant as the Company approaches or crosses the threshold of actual insolvency. Directors' fundamental duties of care and loyalty continue to run to the corporation and its stockholders, but the practical consequence of actual insolvency is that creditors — rather than equity holders — become the residual claimants of the corporate enterprise, and derivative claims on behalf of the corporation may be asserted by creditors.
Adherence to the governance procedures and process protections recommended in this memorandum will maximize the protections afforded to individual directors under the business judgment rule, minimize exposure to personal liability, and create a defensible record of informed, deliberate, good-faith decision-making throughout the restructuring process.
II. Factual Background
A. Corporate Structure and Ownership
Stonefield Logistics Group Inc. is a corporation organized and existing under the laws of the State of Delaware (Delaware Division of Corporations File No. 6341872; Federal Employer Identification Number 83-2457109). The Company's registered agent is Capitol Registered Agents, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. The Company's principal executive offices are located at 4200 Commerce Street, Suite 1500, Dallas, Texas 75201.
Stonefield is the direct subsidiary of Stonefield Logistics Holdings LLC, a Delaware limited liability company that serves as the intermediate holding company in the organizational structure. The Company conducts its operations through several key operating subsidiaries, including Stonefield Freight Services LLC (a Texas limited liability company), Stonefield Last Mile Inc. (a Delaware corporation), and Stonefield Warehousing LLC (a Texas limited liability company). The Company operates approximately 26 terminals across 14 states and employs approximately 3,800 individuals, including terminal managers, drivers, warehouse operators, and corporate and administrative personnel.
The sole equity owner of Stonefield (on a pre-restructuring basis) is Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "Fund III"), a Delaware limited partnership. Fund III's general partner is Ridgeline Capital Management III LLC, a Delaware limited liability company. Fund III invested approximately $210 million in equity in connection with the December 2017 leveraged buyout of Stonefield. Fund III has total committed capital of approximately $1.6 billion, and the Ridgeline platform manages approximately $4.8 billion in assets firm-wide across multiple fund vehicles.
The Board of Directors currently consists of three members. Julian Voight, a Managing Director of Ridgeline Capital Management III LLC, serves as a Board designee of the Sponsor. Serena Chu, a Principal of Ridgeline Capital Management III LLC, likewise serves as a Board designee of the Sponsor. Marcus Delano, the Company's Chief Executive Officer, serves as the management representative on the Board. As further discussed in Section V below, the composition of the Board raises conflict-of-interest considerations that must be carefully managed in the context of the contemplated restructuring.
B. Current Financial Condition
The Company's financial condition has deteriorated materially over the past twelve months, driven principally by the broader freight recession, excess carrier capacity in the domestic transportation market, and the loss of several significant customer contracts. The following summary reflects the Company's current financial position:
Revenue. Fiscal year 2022 revenue was $612.3 million, as audited by Whitfield & Pryce LLP, the Company's independent registered public accounting firm. Management projects fiscal year 2023 revenue of approximately $545.0 million, representing a decline of approximately 11.0% year-over-year. This decline reflects a combination of reduced freight volumes, pricing pressure from excess market capacity, and the loss of three significant customer contracts that collectively accounted for approximately $38 million in annualized revenue.
Adjusted EBITDA. Fiscal year 2022 Adjusted EBITDA was $58.7 million. LTM Adjusted EBITDA as of Q1 2023 has declined to $41.2 million, and management projects a further decline to approximately $38.5 million for fiscal year 2023. Margin compression has been driven by the revenue decline coupled with a relatively fixed cost base, including terminal leases, insurance costs, and salaried personnel expenses.
Capital Structure. The Company's capital structure as of March 31, 2023 is summarized in the following table:
Ridgeline's original equity investment of $210.0 million is significantly impaired based on current enterprise value estimates. At an illustrative enterprise value of $350 million to $400 million (approximately 8.5x to 9.7x FY 2023E Adjusted EBITDA of $38.5 million, based on preliminary indications from Hargrove Advisory Group), the equity would be deeply out of the money.
Leverage. Total leverage is approximately 11.5x LTM Adjusted EBITDA ($475.1M ÷ $41.2M). First lien leverage is approximately 7.9x ($327.0M ÷ $41.2M). Both metrics are substantially in excess of the levels contemplated at the time of the original leveraged buyout and significantly above levels at which refinancing would be available in the current credit markets.
Liquidity. Total liquidity as of March 31, 2023 is approximately $15.8 million, consisting of $11.3 million in unrestricted cash on the Company's balance sheet and approximately $4.5 million in available but undrawn capacity on the revolving credit facility (calculated as $50.0 million committed minus $42.0 million drawn minus $3.5 million in outstanding letters of credit).
Cash Burn. The Company has been consuming cash at a rate of approximately $2.5 million per month during Q1 2023, reflecting the gap between operating cash flows and total cash requirements (including interest expense, capital expenditures, and working capital needs). Based on current projections, and absent a restructuring or other intervention, total liquidity is projected to be exhausted by the third quarter of 2024. However, this liquidity runway does not account for the December 15, 2024 maturity of the first lien debt, which the Company lacks the resources to repay at maturity.
C. Contemplated Restructuring Alternatives
In response to the Company's deteriorating financial condition, the Board has taken steps to engage professional advisors and begin evaluating restructuring alternatives. Calderwood & Harkness LLP was engaged as restructuring counsel to the Company pursuant to an engagement letter dated April 3, 2023. Hargrove Advisory Group LLC ("Hargrove"), under the direction of Managing Director Elena Voss, was retained by the Board as financial advisor pursuant to an engagement letter dated March 15, 2023.
The Company's first lien debt is administered by Pinnacle National Bank, N.A. ("Pinnacle"), which serves as both administrative agent and collateral agent under the First Lien Credit Agreement. The Company's primary contact at Pinnacle is Daniel Wexford, Managing Director of the Loan Restructuring Group. The mezzanine notes were issued pursuant to an indenture with Continental Fiduciary Trust Company as indenture trustee.
An ad hoc group of mezzanine holders formed informally in February 2023 and executed a cooperation agreement on March 10, 2023. The ad hoc group comprises Graystone Mezzanine Capital Fund II LP (holding $52.0 million in face amount), Ashland Structured Credit LLC (holding $40.0 million in face amount), and Dunmore Special Situations Fund LP (holding $30.0 million in face amount), which collectively hold $122.0 million, or approximately 87.1% of the outstanding mezzanine principal. The ad hoc group has retained Thornbury McCaffrey LLP (partner Alan Driscoll) as legal counsel and Meridian Veltrian Partners LLC as financial advisor. The first lien lenders are represented by Westlake Harden & Cole LLP (partner Ramona Quelibo).
Formal negotiations have not yet commenced. An initial meeting with the first lien lender group is scheduled for April 14, 2023, and an initial meeting with the mezzanine ad hoc group is scheduled for April 28, 2023.
The primary restructuring path currently under consideration is a consensual out-of-court restructuring, the key parameters of which include the following:
• Amend-and-Extend of First Lien Credit Facilities. The revolver and Term Loan B would be amended to extend their maturity dates, with potential modifications to amortization, covenants, and pricing to be negotiated with the first lien lenders.
• New-Money Super-Priority Facility. A new super-priority credit facility would be established to provide incremental liquidity to the Company during and after the restructuring process.
• Equitization of Mezzanine Debt. The $140.0 million in mezzanine principal (plus $8.1 million in accrued PIK interest) would be converted into equity of the reorganized Company. Under the restructuring parameters currently under discussion, mezzanine holders would receive approximately 47.5% of pro forma common equity in exchange for the cancellation of their debt claims.
• Dilution of Sponsor Equity. Ridgeline's equity interest would be diluted from 100% to approximately 47.5% of pro forma common equity. Ridgeline is being asked to contribute $12.5 million in new cash equity as a condition of its continued participation.
• Management Equity. Management would receive approximately 5.0% of pro forma common equity through a management incentive plan.
If a consensual out-of-court restructuring cannot be achieved — whether due to holdout creditors, inability to reach agreement on economic terms, or other impediments — the fallback alternative is a Chapter 11 filing, potentially structured as a prepackaged or prearranged plan of reorganization to minimize time in bankruptcy and associated costs.
III. Legal Framework: Fiduciary Duties Under Delaware Law
A. Overview of Director Fiduciary Duties
Because Stonefield is incorporated in Delaware, the fiduciary obligations of the Company's Board of Directors are governed by the Delaware General Corporation Law (the "DGCL") and the extensive body of case law developed by the Delaware Court of Chancery and the Delaware Supreme Court. Delaware law imposes two fundamental fiduciary duties on corporate directors: the duty of care and the duty of loyalty. A third duty — the duty of good faith — is now understood as a component of the duty of loyalty rather than an independent, freestanding obligation.
Duty of Care. The duty of care requires that directors act on an informed basis, in good faith, and with the honest belief that actions taken are in the best interests of the corporation. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The duty of care is principally a process-oriented obligation: it requires directors to inform themselves of all material information reasonably available before making a business decision. Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985). Directors satisfy the duty of care by engaging in adequate deliberation, reviewing material information provided by management and professional advisors, asking questions, and exercising reasonable inquiry before acting. Gross negligence is the standard for liability under the duty of care — a director who acts with adequate information and deliberation, even if the ultimate decision proves unsuccessful, will not be found to have breached this duty.
The duty of care has several practical dimensions that are especially relevant in a restructuring context. Directors should ensure that they receive and review comprehensive financial information about the Company, including current financial statements, management projections, liquidity forecasts, and analyses prepared by the Company's financial advisor. Directors should understand the material terms of the restructuring alternatives being considered and should satisfy themselves — through questions, discussion, and reliance on expert advisors — that they have a sufficient informational foundation on which to act.
Duty of Loyalty. The duty of loyalty requires that directors act in the best interests of the corporation and its stockholders, not in their own self-interest or in the interest of a third party. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). The duty of loyalty prohibits self-dealing transactions, the usurpation of corporate opportunities, and the exercise of directorial authority for improper purposes. A director who stands on both sides of a transaction — or who has a material personal financial interest in a matter before the Board — is subject to heightened scrutiny under the duty of loyalty. In such cases, the director bears the burden of demonstrating that the transaction was entirely fair to the corporation.
The duty of loyalty is of particular significance in the present context because two of the Company's three directors — Julian Voight and Serena Chu — are designees of Ridgeline, the Company's equity sponsor. As discussed in greater detail in Section V below, the interests of the Sponsor and the interests of the Company may not be aligned in all respects as the Company navigates the restructuring process.
Duty of Good Faith. The duty of good faith, once treated as a standalone fiduciary obligation, is now subsumed within the duty of loyalty under Delaware law. Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006); In re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 67 (Del. 2006). The duty of good faith requires that directors act honestly and not with an intent to violate applicable law, and that they not engage in a conscious disregard of their duties. A director who acts with knowledge that his or her conduct is improper, or who deliberately fails to act in the face of a known duty, may be found to have acted in bad faith even if the director did not personally benefit from the conduct. The failure to act in good faith is significant because exculpation provisions under DGCL § 102(b)(7) do not shield directors from liability for acts or omissions not in good faith.
B. The Business Judgment Rule
The business judgment rule is the foundational principle of Delaware corporate governance. It provides a presumption that, in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation. Aronson v. Lewis, 473 A.2d at 812. The business judgment rule is both a standard of review and a substantive rule of law: it protects directors from personal liability for decisions that, while ultimately unsuccessful, were made through a process reflecting due care and good faith.
The burden rests on the party challenging a board decision to rebut the presumption established by the business judgment rule. Unless a plaintiff can demonstrate that directors acted with a conflict of interest, in bad faith, or with gross negligence in their decision-making process, the court will not substitute its own judgment for that of the board. Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000). Where the business judgment rule applies, the court will not second-guess a board's decision even if reasonable minds might disagree about the wisdom of the chosen course of action.
The business judgment rule does not apply in certain circumstances. If a director has a personal financial interest in the transaction, the rule yields to the entire fairness standard, which places the burden on the interested director (or the board) to demonstrate that the transaction was entirely fair in terms of both process and price. Similarly, the business judgment rule does not protect directors who act in bad faith, who fail to inform themselves of reasonably available material information, or who are grossly negligent in their decision-making. In the restructuring context, the practical import of the business judgment rule is clear: the Board should adopt and follow rigorous procedural protections — including adequate information gathering, deliberation, reliance on expert advisors, and thorough documentation — to ensure that the rule's protective presumption attaches to each material decision.
C. Enhanced Scrutiny Standards
In certain transactional contexts, Delaware law applies enhanced scrutiny standards that impose additional obligations on directors beyond the baseline protections of the business judgment rule.
Revlon Duties. Under Revlon, Inc. v. MacAndrews & Forbaci Holdings, Inc., 506 A.2d 173 (Del. 1986), when a board of directors undertakes a sale or change of control of the corporation, the board's fiduciary duty shifts to obtaining the best price reasonably available for the stockholders. Revlon duties are triggered when the transaction will result in a change of control — that is, when a single acquirer or a cohesive group of acquirers will obtain voting control of the corporation. Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994).
A threshold question arises whether the contemplated restructuring — which involves diluting Ridgeline from 100% of the Company's equity to approximately 47.5% and issuing approximately 47.5% to mezzanine holders — could trigger Revlon duties. We believe that Revlon is generally inapplicable to restructurings of the type contemplated here. The transaction does not involve a sale of the Company to a third-party acquirer. Rather, it involves a restructuring of the Company's existing capital structure through the conversion of debt to equity and the infusion of new capital. The mezzanine holders who would receive pro forma equity are a dispersed group of institutional investors, not a single acquirer or cohesive control group. No single holder or group of holders would emerge with majority voting control following the transaction. Accordingly, the restructuring does not appear to constitute a change of control that would trigger Revlon's auction duties.
Notwithstanding this analysis, the Board should be aware that a creative litigant might attempt to argue that the effective transfer of majority economic and voting power from Ridgeline to the mezzanine holders constitutes a change of control warranting Revlon scrutiny. We recommend that the Board document its analysis of this issue, including the basis for its conclusion that no single acquirer is obtaining control and that the mezzanine holders do not constitute a "control group" within the meaning of Revlon and its progeny. To the extent the Board conducts a thorough process, evaluates alternatives, and obtains financial advice supporting the fairness of the transaction, the Board will be well-positioned to defend against any such challenge.
Unocal Duties. Under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), when a board takes defensive measures in response to a perceived threat to the corporation, the board must demonstrate that it had reasonable grounds for believing a danger to corporate policy and effectiveness existed, and that the defensive measures adopted were reasonable in relation to the threat posed. Unocal is not directly implicated by the contemplated restructuring, as the Board is not adopting defensive measures against a hostile bid or unsolicited acquisition attempt. However, we note this standard for completeness, as the Board should be aware of the enhanced scrutiny frameworks that could potentially be implicated in the event the restructuring process evolves in unanticipated directions.
IV. Fiduciary Duties in the "Zone of Insolvency"
A. The Zone of Insolvency Doctrine — Historical Development and Current State
The concept of the "zone of insolvency" — the financial condition in which a corporation is not yet insolvent but is approaching insolvency — has generated significant judicial commentary over the past three decades and has been the subject of considerable doctrinal evolution under Delaware law. The relevance of this doctrine to Stonefield's current circumstances is substantial, and we discuss below the key cases that define the current state of the law.
Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp. (Del. Ch. 1991). The zone of insolvency concept entered Delaware jurisprudence through Chancellor William T. Allen's famous footnote 55 in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., No. Civ. A. 12150, 1991 WL 277613 (Del. Ch. Dec. 30, 1991). In that decision, Chancellor Allen observed that when a corporation is operating in the vicinity of insolvency, its directors are not merely the agents of the residual risk-bearers (i.e., stockholders), but rather owe duties to the "community of interests" that the corporation represents — including creditors, employees, and other stakeholders. Chancellor Allen suggested that, in the zone of insolvency, directors should consider the impact of their decisions on the corporate enterprise as a whole, recognizing that wealth-maximizing strategies for stockholders (such as high-risk, high-reward gambles) may not be in the best interests of the enterprise when the entity's ability to satisfy its obligations to creditors is in question.
Footnote 55 of Credit Lyonnais was widely interpreted as suggesting that, as a corporation approaches insolvency, the fiduciary duties of directors effectively shift or expand to encompass creditor interests. This interpretation influenced judicial thinking in Delaware and other jurisdictions for over a decade and gave rise to what became known as the "zone of insolvency" or "vicinity of insolvency" doctrine.
Production Resources Group, L.L.C. v. NCT Group, Inc. (Del. Ch. 2004). In Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004), Vice Chancellor Strine (as he then was) elaborated on the principles articulated in Credit Lyonnais, noting that as a corporation approaches insolvency, the interests of the corporation's creditors become increasingly important. Vice Chancellor Strine emphasized that directors of a corporation in financial distress must exercise heightened care and should not take actions that improperly divert value from creditors to equity holders.
North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (Del. 2007). The most significant development in Delaware's zone-of-insolvency jurisprudence came in 2007, when the Delaware Supreme Court issued its landmark decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007). In Gheewalla, the Supreme Court directly addressed the question of whether creditors of a Delaware corporation have standing to assert direct fiduciary duty claims against the corporation's directors when the corporation is in the zone of insolvency.
The Court held unequivocally that directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders — not to creditors — even when the corporation is in the zone of insolvency. The Court rejected the notion that creditors acquire independent standing to bring direct claims for breach of fiduciary duty simply because the corporation is approaching insolvency. The Court reasoned that creditors are adequately protected by the contractual terms of their agreements, the implied covenant of good faith and fair dealing, and the law of fraudulent conveyance.
However, the Court drew a critical distinction between the zone of insolvency and actual insolvency. The Court held that when a corporation is actually insolvent, creditors gain standing to assert derivative claims — that is, claims brought on behalf of the corporation — for breach of the directors' fiduciary duties. This is because, upon actual insolvency, creditors become the residual claimants of the corporate enterprise, and the interests of the corporation become effectively synonymous with the interests of the creditor body.
The practical import of Gheewalla is as follows: the zone of insolvency does not create independent duties running from directors to creditors, and creditors cannot bring direct claims against directors simply because the corporation is financially distressed. But once the corporation crosses the threshold into actual insolvency, creditors step into the shoes formerly occupied by stockholders and may enforce the corporation's fiduciary duty claims derivatively. Directors must therefore be attentive to the interests of creditors — not because they owe duties directly to creditors, but because actions taken to the detriment of the corporate enterprise (including its creditors) may give rise to derivative claims that creditors have standing to assert once insolvency becomes a reality.
B. Application to Stonefield's Current Situation
Based on the financial metrics summarized in Section II above, the Company is at minimum in the zone of insolvency and may be approaching or have reached actual insolvency, depending on the solvency test applied.
Solvency Analysis. Delaware courts and the Bankruptcy Code recognize two principal tests for solvency: the balance sheet test (whether the fair value of the corporation's assets exceeds its liabilities) and the cash flow or equitable solvency test (whether the corporation is able to pay its debts as they come due in the ordinary course of business).
Balance Sheet Test. Under the balance sheet test, the Company's solvency depends on whether its total assets, measured at fair value, exceed its total liabilities. As of March 31, 2023, the Company's total funded debt is $475.1 million. The Company's enterprise value — as assessed on a preliminary basis by Hargrove Advisory Group LLC — must be evaluated to determine whether the Company's assets, fairly valued, are sufficient to cover its obligations. The significant impairment of the $210 million Sponsor equity investment is a powerful indicator that the Company's enterprise value may not be sufficient to cover the entirety of its funded debt. If the Company's enterprise value is in the range of $350 million to $400 million, as preliminary Hargrove indications suggest, then on a balance sheet basis the Company's liabilities would exceed its assets by approximately $75 million to $125 million — indicating technical balance sheet insolvency. This analysis would need to be refined through a rigorous valuation process, taking into account the Company's going-concern value, real property and equipment values, intangible assets, and other considerations. Nevertheless, the preliminary data strongly supports the conclusion that the Company is at least in the zone of insolvency, if not actually balance-sheet insolvent.
Cash Flow Test. Under the cash flow or equitable solvency test, the question is whether the Company is able to pay its debts as they become due in the ordinary course of business. The Company's projected inability to meet its obligations as they mature presents a strong case for insolvency under this test. Specifically:
• The Company's $327.0 million in first lien debt matures on December 15, 2024. The Company has no realistic prospect of repaying this debt at maturity from operating cash flows, existing liquidity, or a market refinancing given its current leverage profile.
• Monthly cash burn of $2.5 million, against total liquidity of only $15.8 million, projects to liquidity exhaustion by Q3 2024 — even before accounting for the maturity of the first lien debt.
• The Company's LTM Adjusted EBITDA of $41.2 million is insufficient to service total annual interest expense (estimated at approximately $35 million to $40 million on a cash-pay basis, depending on the SOFR rate environment), let alone fund capital expenditures, working capital needs, and debt repayment.
While the December 2024 maturity is approximately 20 months away, Delaware courts have recognized that the inability to pay debts as they mature in the foreseeable future — particularly when the maturity date is known and the Company's resources are manifestly insufficient — can support a finding of insolvency under the cash flow test. The Company's cash flow profile, combined with its inability to refinance its capital structure in the current market, creates a strong inference that the Company cannot meet its obligations as they come due.
Practical Conclusion. While the doctrinal framework established by Gheewalla holds that fiduciary duties do not formally shift to creditors in the zone of insolvency, the Board should, as a matter of sound governance, prudent risk management, and litigation risk mitigation, consider the interests of all stakeholders — including the first lien lenders, the mezzanine holders, employees, trade creditors, and other constituents — in evaluating restructuring alternatives and making decisions throughout the restructuring process. The Board should not take actions designed to benefit the equity sponsor at the expense of creditors or the corporate enterprise as a whole. If the Company is found to have been actually insolvent at the time of the restructuring, creditors could assert derivative claims against the directors for breach of fiduciary duty, and the Board's decisions will be evaluated in light of whether they were made in the best interests of the corporate enterprise, including its creditors as residual claimants.
C. Duties to Creditors Upon Actual Insolvency
As set forth in Gheewalla, once a corporation becomes actually insolvent, creditors acquire standing to assert derivative fiduciary duty claims against the corporation's directors. This is a significant legal development that has direct practical implications for the Board's conduct during the restructuring process.
It is important to understand what Gheewalla does and does not hold. The decision does not hold that directors' fiduciary duties run directly to creditors upon insolvency. Rather, directors' duties continue to run to the corporation itself. What changes upon insolvency is the identity of the constituency that has standing to enforce those duties derivatively: whereas stockholders are the ordinary derivative plaintiffs when a corporation is solvent, creditors step into that role when the corporation is insolvent, because creditors — not stockholders — are the residual claimants of an insolvent enterprise.
The practical consequence of this framework is that directors of an insolvent (or potentially insolvent) corporation must avoid actions that favor one constituency at the expense of the corporate enterprise as a whole. In the Stonefield context, the most significant risk is that directors might take actions that favor Ridgeline — as the 100% equity holder and as the entity whose designees hold a majority of the Board seats — at the expense of creditors who, in the event of insolvency, would be the residual claimants.
Examples of actions that could give rise to derivative fiduciary duty claims by creditors in the event of actual insolvency include the following:
• Extracting dividends or distributions from the Company to Ridgeline when the Company is insolvent or when such payments would render the Company insolvent.
• Engaging in preferential transactions with Ridgeline or its affiliates, such as paying management fees, advisory fees, or other amounts to the Sponsor that are not supported by fair consideration.
• Pursuing unreasonable delay tactics that dissipate the Company's limited liquidity and assets, particularly if such delay serves primarily to preserve optionality for the equity sponsor rather than to maximize value for the corporate enterprise.
• Approving a restructuring transaction on terms that are unfair to the corporate enterprise — for example, allocating an excessive share of pro forma equity to the Sponsor relative to its economic contributions, or failing to negotiate arm's-length terms for the Sponsor's continued participation.
• Failing to adequately evaluate alternatives to the proposed restructuring, including alternatives that might produce better outcomes for the corporate enterprise and its creditors even if they result in greater dilution or elimination of the Sponsor's equity.
The Board should be mindful of these risks and should conduct the restructuring process in a manner that demonstrates consideration of all stakeholder interests, not solely the interests of the equity sponsor.
V. Specific Considerations for Sponsor-Appointed Directors
A. Dual Roles of Julian Voight and Serena Chu
Two of the Company's three directors — Julian Voight and Serena Chu — serve on the Board as designees of Ridgeline Capital Management III LLC, the general partner of Ridgeline Capital Partners Fund III, L.P. Mr. Voight is a Managing Director of Ridgeline Capital Management III LLC, and Ms. Chu is a Principal of the same entity. Both individuals owe professional obligations to Ridgeline and its limited partners in their capacities as officers or employees of the general partner. At the same time, as directors of Stonefield, their fiduciary duties run to Stonefield and (during periods of solvency) its stockholders — not to Ridgeline's limited partners, Ridgeline's management company, or Ridgeline's own economic interests as the equity sponsor.
This dual role is common in private equity-backed companies, and Delaware law recognizes that sponsor-designated directors may serve in both capacities. However, the potential for conflicts of interest is heightened in a restructuring context where the sponsor's economic interests may diverge from the interests of the corporation and its creditors. In the present case, several specific areas of potential conflict are readily identifiable:
• Equity Dilution. Ridgeline invested $210 million in equity in the 2017 leveraged buyout. That investment is significantly impaired. The contemplated restructuring would dilute Ridgeline from 100% to approximately 47.5% of pro forma common equity, while mezzanine holders would receive approximately 47.5% of pro forma equity in exchange for cancellation of their debt claims. Ridgeline may have an interest in resisting dilution or negotiating for a greater share of pro forma equity, even if doing so is not in the best interest of the corporate enterprise as a whole.
• New Equity Contribution. Ridgeline is being asked to contribute $12.5 million in new cash equity as a condition of its continued participation. Ridgeline may be reluctant to commit additional capital to a distressed investment, or may condition its participation on terms that are not aligned with the interests of the corporation.
• Preservation of Optionality. As the equity holder, Ridgeline may prefer strategies that preserve the option value of its equity position — such as delaying a restructuring or pursuing higher-risk turnaround strategies — whereas creditors may prefer certainty and near-term deleveraging to protect their recoveries.
• Affiliate Transactions. To the extent Ridgeline or its affiliates have any ongoing contractual relationships with the Company (such as management services agreements, monitoring fees, or other arrangements), these could present additional conflict issues in the restructuring context.
Mr. Voight and Ms. Chu must exercise care to ensure that their conduct as Stonefield directors is guided by their fiduciary duties to the Company, and that they do not subordinate those duties to the interests of the Sponsor. The fact that both individuals receive their compensation from Ridgeline and owe professional duties to Ridgeline's limited partners does not relieve them of their obligations to Stonefield. To the contrary, the existence of these dual loyalties heightens the scrutiny that a court would apply to their actions in the event of a challenge.
B. Managing Conflicts
In light of the conflicts identified above, we recommend the following measures to ensure that the restructuring process is conducted in a manner that appropriately manages conflicts of interest and creates a defensible record of independent decision-making:
Disclosure. Mr. Voight and Ms. Chu should disclose any conflicts of interest arising from their dual roles as Ridgeline designees and Stonefield directors at the outset of Board deliberations regarding the restructuring. This disclosure should be made on the record, documented in the minutes of the Board meeting at which it occurs, and updated as circumstances evolve throughout the restructuring process.
Independent Director or Special Committee. The Board should give serious consideration to appointing at least one independent director — that is, a director who has no affiliation with Ridgeline and no material personal interest in the restructuring outcome — to evaluate the restructuring transaction. Alternatively, or in addition, the Board could form a special committee of independent directors charged with evaluating the specific terms of Ridgeline's continued participation in the restructuring, including the new equity contribution, the allocation of pro forma equity, and any other terms that implicate the Sponsor's interests. A special committee with authority to retain independent advisors and to negotiate on behalf of the Company would significantly strengthen the Board's litigation posture in the event of a subsequent challenge.
Arm's-Length Negotiations. All negotiations between the Company and Ridgeline regarding the terms of Ridgeline's equity contribution, pro forma equity allocation, and continued involvement should be conducted on an arm's-length basis. The Company should be represented in such negotiations by its independent advisors — Calderwood & Harkness LLP and Hargrove Advisory Group LLC — and the terms should reflect the outcome of genuine bargaining rather than a unilateral determination by Ridgeline-affiliated directors.
Independent Advisors. The Company has already engaged Calderwood & Harkness LLP as restructuring counsel and Hargrove Advisory Group LLC as financial advisor. If a special committee is formed, the committee should have the authority to retain its own independent legal and financial advisors if it determines that doing so is appropriate. At a minimum, the Board should ensure that the Company's existing advisors are providing advice that is independent of Ridgeline's influence and that their engagement letters reflect their duty to the Company (and, if applicable, the special committee) rather than to the Sponsor.
Judicial Precedent. The importance of these procedural protections is underscored by the Delaware Court of Chancery's decision in In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013). In Trados, the Court held that where a board is controlled by directors affiliated with a private equity sponsor, and the transaction effectively transfers value from common stockholders to preferred stockholders (or, by analogy, to creditors), the entire fairness standard of review may apply unless the board employs procedural protections such as an independent committee or disinterested director approval. In that case, the court found that the transaction — while ultimately fair in result — was not the product of fair dealing because the board failed to adequately consider the interests of the common stockholders. The Trados decision serves as a cautionary example for boards of sponsor-controlled companies navigating transactions in which the sponsor's interests may diverge from the interests of the corporate enterprise.
While the factual posture of the Stonefield restructuring differs from Trados in material respects (most notably, Ridgeline is the sole stockholder, so there are no minority common stockholders whose interests might be adversely affected), the principles articulated in Trados are nonetheless instructive. A board controlled by sponsor-affiliated directors that approves a restructuring transaction benefiting the sponsor without adequate procedural protections risks having its decisions evaluated under the entire fairness standard — a far more exacting standard of review than the business judgment rule.
VI. The Business Judgment Rule Applied to Restructuring Decisions
A. Process Protections to Maximize Business Judgment Rule Protection
Given the significance of the restructuring decisions confronting the Board and the potential for challenges from creditors or other parties, it is essential that the Board adopt rigorous procedural protections designed to ensure that the business judgment rule attaches to each material decision. The following process protections are recommended:
1. Informed Decision-Making
The duty of care requires that directors act on an informed basis. In the restructuring context, this means that directors should receive and review all material financial information relevant to the Company's financial condition and the restructuring alternatives under consideration. Specifically, directors should receive and review:
• The preliminary capital structure analysis prepared by Calderwood & Harkness LLP (dated April 10, 2023), which sets forth the Company's current capital structure, maturity profile, and leverage metrics.
• The financial analysis prepared by Hargrove Advisory Group LLC, including projected fiscal year 2023 Adjusted EBITDA of $38.5 million and fiscal year 2024 Adjusted EBITDA of $52.0 million (reflecting an assumed recovery in freight markets), as well as valuation analyses, recovery analyses, and liquidity forecasts.
• The audited financial statements for fiscal year 2022 prepared by Whitfield & Pryce LLP, reflecting revenue of $612.3 million and Adjusted EBITDA of $58.7 million.
• Management projections, including fiscal year 2023 revenue of approximately $545.0 million, together with supporting assumptions regarding freight volumes, pricing, customer retention, and operating cost trends.
• Detailed liquidity forecasts and cash runway analyses, including scenarios reflecting the impact of various restructuring alternatives on the Company's near-term and medium-term liquidity position.
• Any term sheets, proposals, or indications of interest received from creditor groups, potential new-money providers, or other parties.
Directors should be briefed on the material terms of each restructuring alternative under consideration, including the proposed out-of-court restructuring (amend-and-extend, new-money facility, mezzanine equitization), the Chapter 11 fallback, and any other alternatives identified by the Company's advisors. These briefings should be conducted through formal presentations by Calderwood & Harkness LLP and Hargrove Advisory Group LLC, with adequate time for directors to ask questions and engage in discussion.
Directors who do not have financial or restructuring expertise should not hesitate to ask questions or request additional information or explanation. The duty of care is satisfied by reasonable inquiry, not by passive receipt of information. The record should reflect that directors actively engaged with the materials presented and sought clarification where needed.
2. Deliberation and Documentation
The quality and completeness of the Board's deliberative process is critical to the application of the business judgment rule. All Board meetings should be properly noticed and convened in accordance with the Company's certificate of incorporation and bylaws. A quorum should be present at each meeting, and the participation of each director should be documented.
Minutes should be maintained for all Board meetings, including executive sessions. The minutes should reflect, at a minimum: (i) the information presented to the Board by management and advisors; (ii) the questions asked by directors and the responses provided; (iii) the range of alternatives considered; (iv) the deliberative process, including the factors weighed and the rationale for the Board's decisions; and (v) the formal actions taken, including any votes and the basis therefor. Minutes should be reviewed and approved by the Board at the next subsequent meeting.
Key decisions throughout the restructuring process — including the approval of any term sheet, the authorization to enter into a restructuring support agreement, the approval of definitive documents, and the closing authorization — should be memorialized in formal board resolutions, duly adopted in accordance with the Company's governing documents and the DGCL. Resolutions should set forth the specific actions authorized, the directors voting in favor and against, and any recusals or abstentions.
3. Reliance on Expert Advisors
Under DGCL § 141(e), directors are entitled to rely in good faith on information, opinions, reports, or statements presented by officers, employees, committees of the board, or experts selected with reasonable care, including legal counsel, financial advisors, and accountants. This statutory protection is an important complement to the business judgment rule, as it recognizes that directors are not expected to possess personal expertise in all areas relevant to their decision-making.
The Board has engaged two highly qualified advisory firms: Calderwood & Harkness LLP as restructuring counsel and Hargrove Advisory Group LLC as financial advisor. Directors should ensure they receive reasoned, substantive advice from these advisors on each material issue and decision point in the restructuring process. The advice received should be documented — through written memoranda, presentations, or minutes reflecting oral advice — so that the Board's reliance on its advisors is a matter of record.
Directors should also satisfy themselves that the advisors engaged by the Company are independent and free of conflicts of interest that might impair their ability to provide disinterested advice. To the extent any actual or potential conflicts are identified, they should be disclosed and addressed.
4. Consideration of Alternatives
A hallmark of a well-conducted restructuring process is the board's consideration of a range of alternatives, rather than a single-minded focus on one predetermined outcome. The Board should evaluate and document its consideration of the following alternatives:
• Consensual out-of-court restructuring. The primary path under consideration, involving an amend-and-extend of the first lien credit facilities, a new-money super-priority facility, and equitization of the mezzanine debt, with Ridgeline retaining approximately 47.5% of pro forma equity and contributing $12.5 million in new equity.
• Chapter 11 filing with a prearranged or prepackaged plan. A bankruptcy filing in which the key terms of a plan of reorganization have been negotiated and agreed with major creditor groups prior to filing, minimizing time in bankruptcy and associated administrative costs.
• Sale of the Company or its assets. A sale process, whether conducted under Section 363 of the Bankruptcy Code or through a private process, to maximize value for the benefit of the corporate enterprise and its stakeholders.
• Standalone operating plan. Continuation of the Company's operations without a restructuring transaction, potentially involving partial measures such as asset dispositions, cost reductions, or targeted negotiations with individual creditors. The Board should evaluate the feasibility and risks of this alternative, including the consequences of the December 2024 maturity.
• Liquidation. An orderly or forced liquidation of the Company's assets, either in or out of bankruptcy. Although liquidation is generally the least desirable outcome, the Board should obtain a liquidation analysis — which Hargrove Advisory Group LLC should prepare — to benchmark creditor recoveries under the proposed restructuring against the recoveries that would be available in a liquidation scenario. This analysis serves the dual purpose of informing the Board's deliberations and demonstrating that the chosen restructuring path provides superior value to stakeholders.
The Board should document its analysis of each alternative, including the basis for its conclusion that the chosen path — or the path ultimately selected — is in the best interest of the corporate enterprise. This documentation creates a contemporaneous record that will be invaluable in defending the Board's decisions against subsequent challenges.
5. Good Faith
The duty of good faith requires that directors act with subjective honesty of purpose and without an intent to violate applicable law. In the restructuring context, this means that directors should not knowingly cause the Company to breach its contractual obligations — including credit agreement covenants, indenture provisions, and other contractual commitments — without a legitimate business justification and appropriate legal advice. Directors should not act with the intent to harm any constituency or to prefer one group of stakeholders over another in a manner that is detrimental to the corporate enterprise.
Good faith also requires that directors not engage in a conscious disregard of their duties. A director who fails to attend Board meetings, fails to review material information, or fails to engage in the deliberative process may be found to have acted in bad faith, even if the director did not affirmatively intend harm. All directors should participate actively and substantively in the restructuring process.
B. Entire Fairness as Potential Alternative Standard of Review
As noted above, if the restructuring transaction is characterized as a transaction between the Company and its controlling stockholder (Ridgeline), the standard of review applied by a Delaware court may shift from the deferential business judgment rule to the more exacting entire fairness standard. Under the entire fairness standard, the burden falls on the fiduciary (the board or the controlling stockholder) to demonstrate that the transaction was entirely fair to the corporation in terms of both process ("fair dealing") and economics ("fair price"). Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).
The risk that entire fairness review could apply to the Stonefield restructuring is non-trivial. Two of the three directors are designees of Ridgeline, the controlling stockholder. The restructuring transaction directly affects Ridgeline's economic interests — diluting its equity stake, requiring a new equity contribution, and potentially imposing governance or other conditions on its continued participation. These facts could support an argument that the Board's decision-making was not independent of the controlling stockholder and that the entire fairness standard should apply.
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), the business judgment rule may be restored in a controlling-stockholder transaction if the transaction is conditioned ab initio on both (i) approval by a fully empowered special committee of independent and disinterested directors, and (ii) approval by a majority of the minority stockholders in a non-waivable condition. In the Stonefield context, the second prong — minority stockholder approval — is not available because Ridgeline is the sole stockholder of the Company. There are no minority stockholders whose approval could be obtained.
Given the absence of minority stockholders, the most important procedural protection available to the Board is the formation of a special committee of independent directors (or, at a minimum, the involvement of at least one independent director) with authority to evaluate the restructuring terms, particularly as they relate to Ridgeline's participation, and to negotiate on behalf of the Company. The special committee should retain independent advisors and should conduct a thorough process — including a valuation analysis, a review of the allocation of pro forma equity, and an assessment of the reasonableness of the terms of Ridgeline's new equity contribution — that demonstrates the fairness of the transaction from the perspective of the corporate enterprise and all of its stakeholders.
Even if the entire fairness standard is ultimately applied, the Board can prevail by demonstrating that the restructuring was fair in both process and result. A well-documented process, conducted by an independent or quasi-independent board (or committee thereof) with the benefit of competent and unconflicted advisors, significantly increases the likelihood of a favorable outcome under entire fairness review.
VII. Avoidance of Fraudulent Transfer and Preferential Transfer Risk
A. Fraudulent Transfer Considerations
In addition to fiduciary duty considerations, the Board should be attentive to the risk that payments or transfers made in connection with the restructuring could be challenged as fraudulent transfers under applicable law. Fraudulent transfer law provides a mechanism for creditors (or a bankruptcy trustee, if a Chapter 11 case is subsequently filed) to avoid and recover transfers that were made with the intent to defraud creditors (actual fraud) or that were made for less than reasonably equivalent value when the transferor was insolvent or rendered insolvent by the transfer (constructive fraud).
Under the Texas Uniform Fraudulent Transfer Act (Tex. Bus. & Com. Code §§ 24.001–24.013), which is applicable to the Company's Texas-domiciled operations, a transfer is constructively fraudulent if the debtor made the transfer without receiving a reasonably equivalent value in exchange and the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer. Under Bankruptcy Code § 548, if a Chapter 11 case is filed within two years of the transfer, the trustee (or debtor-in-possession) may avoid transfers made for less than reasonably equivalent value while the debtor was insolvent.
In the restructuring context, the Board should evaluate whether any payments made in connection with the transaction could be challenged as constructive fraudulent transfers. Specific payments warranting scrutiny include:
• Consent Fees. The proposed restructuring contemplates consent fees of $1.425 million to Term Loan B lenders (50 basis points on $285.0 million outstanding) and $87,500 to revolver lenders (25 basis points on $35.0 million consenting principal), totaling approximately $1.5125 million. These fees represent consideration paid to induce lender consent to the amended terms and should be analyzed to confirm that they constitute reasonably equivalent value — i.e., that the benefit the Company receives from the lenders' consent (the restructured credit facilities) is proportionate to the cost. Given that the consent fees are customary in the market and are a necessary condition of the restructuring, they should be defensible as reasonably equivalent value.
• Advisory Fees. Professional fees payable to the Company's legal and financial advisors, and fees payable to the creditors' advisors (to the extent the Company has agreed to reimburse such fees), should be evaluated to confirm that they are reasonable in amount and supported by services rendered.
• OID on the Super-Priority Facility. The proposed new-money super-priority facility contemplates original issue discount of approximately $1.1 million. This OID represents a cost of borrowing that is customary in the distressed lending market and should be supported by the value of the new liquidity provided to the Company.
Importantly, several features of the proposed restructuring affirmatively support its characterization as a value-enhancing transaction rather than a f