Over at the Race to the Bottom, Harry Gerla has had several posts on the failed Caremark revolution.  The premise is that the famous 1995 Delaware Chancery Court case has had little impact because its standards for liability are so lax that it is extremely difficult for plaintiffs to succeed in a Caremark claim.  I agree in part--it is indeed very hard to succeed with a Caremark claim.

I do not think it follows, though, that Caremark has failed to have a significant impact.  I suspect that Caremark was designed to be part of a breed of Delaware case that strives to give guidance and change norms, and hence behavior, without actually holding anyone legally liable for bad behavior.  In a later post I will try to explain why I think this is a sensible strategy in some categories of cases, including Caremark--Claire Hill and I have started to set out our explanation in a recent article.  If we are right that Caremark belongs to this genre of cases (and we are far from alone in that belief), then it is no strike against Caremark to point out that few plaintiffs have succeeded with a Caremark claim.  The real question is whether the case has succeeded in changing norms and behavior.  My own highly sketchy sense is that it has.  Backing up that claim empirically is hard, but that's where the real question lies.

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Urban Decay is a wonderful case about the obligations of founders to each other at the earliest stages of a company's existence. Facebook's founder, Mark Zuckerberg, is enmeshed in a lawsuit with some former friends from Harvard (Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra), who founded a company called ConnectU. This case is scheduled for a hearing next week, and it could turn out to be the next Urban Decay.

According to a complaint filed in the Federal District Court for the District of Massachusetts, the ConnectU founders "engaged Mark Zuckerberg to complete the computer program software and database definitions" for a social networking site. Zuckerberg was given access to ConnectU's code, as it stood in late 2003. The ConnectU founders now claim that Zuckerberg misappropriated trade secrets, infringed on copyrights, breached a contract, breached an implied covenant of good faith and fair dealing, breached fiduciary duties, and committed fraud -- among other things -- in the founding of Facebook.

The plaintiffs did not allege the formation of a partnership (the successful claim in Urban Decay), despite these allegations in the complaint:

Divya Narendra asked Zuckerberg if he would like to be part of a website that Narendra and his team were developing.

Zuckerberg agreed to be a member of the harvardconnection.com website development team ..., to develop the [code], and to help launch, promote, and operate the site and business, in exchange for a beneficial interest in the website, including a monetary interest in any revenue or other proceeds or benefits from the website....

Had the plaintiffs been aiming at partnership formation, they would have benefited from an agreement to share profits, not revenues. Under the facts pleaded, it's not clear whether Zuckerberg would be a partner, but that looks like an agency agreement (which gives rise to fiduciary obligations).

The plaintiffs also failed to rely on the opportunity doctrine (perhaps because they had not formed a business entity?), but the complaint alleges that Facebook's launch "usurped [a] valuable business opportunity."

As it stands, the case is procedurally muddled. In a memorandum supporting Zuckerberg's motion to dismiss, Zuckerberg's lawyers offer arguments based on statutes of limitations and pleading requirements, and they contend that ConnectU does not own the claims because the company was not founded until later. (ConnectU addresses most of these issues in a prior filing.) If ConnectU can overcome these initial hurdles, we could have an interesting case on our hands.

Thanks to Valleywag for flagging the lawsuit and providing a gallery of wannabe Facebook founders.

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On Friday, in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, the Delaware Supreme Court cleared up some confusion about directors' fiduciary duties in distressed firms.  The most important thing to know about the case is that the court cited me in passing (JK), as well as fellow corporate law bloggers Steve Bainbridge and Larry Ribstein.      

In its principal holding, the court held that for a firm in the zone of insolvency (ZOI), its creditors have no direct breach of fiduciary duty claims against the firm's directors. 

Perhaps more interesting, language in the opinion also casts serious doubt about whether creditors can even bring ZOI derivative claims:

When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change:  directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.  (Emphasis supplied).

By contrast, discussing actually insolvent firms later in the opinion, the court confirms the long standing view that creditors replace shareholders as the firm's residual claimants:

Consequently, the creditors of an insolvent corporation have standing to maintain derivative claims against directors on behalf of the corporation for breaches of fiduciary duties.  (Emphasis in original).

The opinion suggests, therefore, that the ZOI concept famously described in Credit Lyonnais will no longer have any continuing relevance as a legal concept.  On balance, this is probably the right result.  It's hard for directors to know when they're in an ill-defined "zone" of insolvency.  So for purposes of "providing directors with definitive guidance," as the Gheewalla court attempts to do, doing away with ZOI is probably a good thing.

OTOH, drawing the line at insolvency seems somewhat arbitrary, and ZOI is not without some conceptual basis.  As I wrote in Gap Filling in the Zone of Insolvency,

Insolvency is not some magic event that triggers perverse incentives for managers that do not exist before insolvency. Instead, the agency cost of debt is increasing in the percentage of outside financing comprised of debt versus equity.

Insolvency, then, is just the extreme case of perverse managerial incentives to make inefficient investment decisions on behalf of equity.  What ZOI does--under any reasonable definition--is simply capture a larger share of those states of the world in which managers may have these perverse incentives.  For a legal rule, though, it's pretty vague.  Of course, one might suggest drawing a different line--say, when the debt-equity ratio hits 9:1.  The valuation issues are probably no worse at 9:1 than at insolvency (and the factual issues for equitable insolvency are likely to be even more intractible).  OTOH, the insolvency line may be defensible as a sort of focal point?

Finally, the court held that even for insolvent firms, creditors could not assert direct claims, but only derivative claims.  The court expressly overruled the Chancery Court's Production Resources decision in this regard.

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The W$J has an article on unexpected conflicts faced by venture capitalists whose portfolio companies change course. These problems are exacerbated by intense competition for profitable business models and the increased holding periods that result from a relatively weak IPO market.

The response has been for VC firms or portfolio companies to adopt conflict-of-interest policies. Another option would be to waive the director's fiduciary duty, though this introduces additional complexity and uncertainty on the legal side, as the ability to contract out of fiduciary duty varies by form of entity and state of organization.

It's a shame that the law relating to the waiver of fiduciary obligation is not clearer because it could provide useful guidance to business people. For some more thoughts on contracting out of fiduciary duty, see the appropriate section of this article.

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So yesterday everyone is chuckling at the fourth-year associate who attached a complaint that was filed under seal to a motion, thereby letting it sit where it would inevitably be found (by someone at the WSJ) and leaked.  However, this is least interesting part of the story to me.  This is the interesting part.

Mercury Interactive was one of the first company to fess up to backdating options, restating earnings by $570 million.  The board formed a special litigation committee which filed a derivative lawsuit on behalf of two shareholders (wow, just like it's supposed to work), against the four former officers who engaged in the backdating.  The board files the complaint in California state court on September 22, 2006.  The defendants fight to have the complaint sealed because it contains fairly incriminating information from emails that talked about using "magic backdating ink" on stock options and stated "the stock price drop made us change the grant date."  OK, so the suit seems to have some legs, if a court thinks that backdating options is either a breach of fiduciary duty of in violation of the California Corporations Code (which brings treble damages).

However, in November 2006, Hewlitt-Packard buys Mercury.  A month or two later, the California court dismisses the suit because the shareholders no longer have standing.  (The acquiring firm by operation of law acquired all the liabilities of Mercury, but apparently the old shareholders had their claimed purchased by operation of law.)  I cannot find a copy of the dismissal order, if there is one, but I would like to ponder it for awhile.

So, I have some questions for the fiduciary duty gurus:  First, what did the board of Mercury want to happen with the suit?  Did they really want it to succeed?  Where they happy to negotiate the acquisition by H-P to make it go away?  Is that some strange conflict of interest for the board to represent the shareholders in litigation but also negotiate an acquisition that will make it disappear?  Second, did the shareholders actually receive as compensation for their shares an amount equal to what they would have gotten (directly or indirectly) if the officers had been found liable and paid damages?  If two shareholders wanted the suit, are these the majority?  Did the board just find away to wash out the litigious shareholders?

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In 1993 Justice Horsey of the Delaware Supreme Court penned this unfortunate sentence in the second major Technicolor opinion: "To rebut the [business judgment] rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty -- good faith, loyalty or due care."

Triads?

In Gaylord, Vice-Chancellor Strine tweaked the Delaware Supreme Court for its use of the plural "triads" and for identifying "good faith" as a separate fiduciary duty: "Indeed, the very Supreme Court opinion that refers to a board's 'triads [sic] of fiduciary duty [sic] -- good faith, loyalty [and] due care,' equates good faith with loyalty."

In subsequent opinions, the Delaware courts and commentators charitably reduced the number of triads to one, but confusion remained about the role of "good faith" in fiduciary litigation. We had a lot to say here about the Disney litigation, and if you were following that conversation, you might remember a lingering issue from the Supreme Court's most recent opinion: does the duty of good faith provide an independent basis for director liability?

My initial take on the Disney opinion was unequivocal:

The Court clearly embraces the duty of good faith as a distinct duty, separate from care and loyalty. For example, "grossly negligent conduct, without more, does not and cannot constitute a breach of the fiduciary duty to act in good faith."

In a subsequent post, I addressed Footnote 112 of Disney, which reads as follows:

[W]e do not reach or otherwise address the issue of whether the fiduciary duty to act in good faith is a duty that, like the duties of care and loyalty, can serve as an independent basis for imposing liability upon corporate officers and directors. That issue is not before us on this appeal.

I argued that "footnote 112 was an afterthought designed to secure a vote for the opinion in pursuit of unanimity." I speculated privately to several colleagues that Justice Holland had demanded the footnote, though what he intended to do with it I wasn't sure.

Now I know. The triad is dead.

Yesterday, the Delaware Supreme Court issued a unanimous, en banc opinion that seems to drive a stake in the heart of "the fiduciary duty of good faith." The following comes from Stone v. Ritter:

It is important, in this context, to clarify a doctrinal issue that is critical to understanding fiduciary liability under Caremark as we construe that case. The phraseology used in Caremark and that we employ here—describing the lack of good faith as a "necessary condition to liability"—is deliberate. The purpose of that formulation is to communicate that a failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability. The failure to act in good faith may result in liability because the requirement to act in good faith "is a subsidiary element[,]" i.e., a condition, "of the fundamental duty of loyalty." It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.

This view of a failure to act in good faith results in two additional doctrinal consequences. First, although good faith may be described colloquially as part of a "triad" of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith. As the Court of Chancery aptly put it in Guttman, "[a] director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation's best interest."

I will have a lot to say about this at some future date, probably in a law review article, but the first question that springs to mind is this: Has the Delaware Supreme Court been acting in good faith in its development of the duty of good faith?

Over the past decade, the Court has had numerous opportunities to "clarify" this issue, and the Court has consistently muddied the waters. As noted above in my Gaylord citation above, the Court of Chancery responded to Justice Horsey's unfortunate sentence by treating the mysterious duty of good faith as a species of loyalty violation, but the Supreme Court repeatedly emphasized the distinctiveness of "the duty of good faith." I never liked the idea that good faith was part of the duty of loyalty, but if that's where the Supreme Court wanted it, did we really need over a decade to figure that out?

We are told that the duty of good faith is connected to Caremark, which the Supreme Court has cited in three other cases, though never with the complete endorsement of the Caremark standard that appears in Stone. This makes sense to me, given the notion of "good faith" articulated in the Disney cases.

Then we are told that Caremark is really a duty of loyalty case. Not duty of loyalty in the traditional sense -- you know, those cases "involving a financial or other cognizable fiduciary conflict of interest" -- but something different. More like a good faithy version of loyalty. Ok, I think I basically get good faith after Disney, but why dilute a useful and longstanding conception of loyalty with these other fact situations? Was the post-Disney triad broken and in need of repair?

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While today might be about Enron rather than Disney, I promised two posts on Disney, so here goes the second...

In response to Disney, Lisa asked why courts feel the need to distinguish between best practices and acceptable practices, as only the latter are relevant to legal liability. Both Melvin Eisenberg, see 62 Fordham L. Rev. 437 (1993), and Gordon have argued that a dual structure of corporate law which bifurcates best practices and acceptable practices does serve a purpose. By aiming discussions of best practices at directors, it encourages better behavior; by aiming discussions of acceptable practices at courts, it tells them when to impose liability. In my last post on individual vs. collective director liability, I noted that courts have used the laxer collective approach to assess liability in duty of care cases, meaning that a single director’s carelessness is legally excused if the other directors complied with their duties. I also noted that courts have only implicitly adopted this approach. Could courts be hiding the ball on the collective approach because they aren’t eager to announce to directors just how low the bar is set, perhaps in the hopes of encouraging better conduct?

I’m skeptical that hiding the ball in this way pays great dividends in practice, as directors surely know how low the bar is set for careless behavior. Even if directors don’t know that liability will be assessed only collectively, they have to be aware of the business judgment rule and § 102(b)(7). Also, it could be that courts haven’t explicitly addressed the choice of assessment approach for other reasons (maybe it’s obvious? or maybe courts haven’t thought it through?). But I like to think that the courts’ handling of the individual/collective question may support Gordon’s and Eisenberg’s very interesting work.

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When the Delaware Supreme Court issued its most recent opinion in Disney, Lisa posted on two very interesting aspects of the case: first, that the Supreme Court punted on whether a director’s fiduciary duty breach should be assessed individually or collectively; and second, that the Supreme Court, like the Chancery Court, distinguished between a board’s best practices and its acceptable practices. In my next two posts, I’ll revisit those issues.

First, should director liability in fiduciary duty suits be assessed individually or collectively? This is a question that few courts or academics have explicitly addressed. However, in looking at the case law, it’s clear that courts analyze duty of loyalty breaches individually, meaning that a disloyal director may be liable even if all other directors complied with their fiduciary duties. On the other hand, although it’s less clear, courts have tended to analyze duty of care breaches collectively, meaning that one director’s carelessness is legally excused if the remaining directors have met their duties. Although my initial thinking was that collective liability might operate as a collective sanction, punishing non-breachers (as well as the breacher) for lax monitoring, courts don’t appear to use it in this way. Instead, they shield the breacher so as not to punish the non-breachers.

In a work-in-progress, I argue that an individual/collective focus that shifts based on fiduciary duty type is desirable on corporate governance policy grounds because it strikes the right balance between a board’s authority and its accountability. (Both Gordon and Stephen Bainbridge have discussed the importance of this balance, and I draw heavily on their work.) In short, self-dealing is intentional wrongdoing, typically by inside directors, and can therefore taint the board’s process in a meaningfully way even if only one director does it. To preserve a functioning board, courts must favor accountability over authority in these situations. Conversely, negligence (even gross negligence) is unintentional wrongdoing, typically by outside directors, and is therefore less likely to meaningfully impact the board’s functioning if there's only one culprit. The board can still function adequately, if not perfectly, with an absentee director (either in body or in mind), so courts should favor authority over accountability in these situations.

In its current form, my paper argues that this duty-based answer to the individual/collective question is both descriptively accurate and normatively desirable. As I continue to work through the implications of this framework, I hope to illustrate how it would be used in concrete cases; e.g., in derivative suits over stock option backdating. Also, I’m less clear on how relevant the issue is to the early stages of litigation – discovery, demand, etc. – as opposed to the trial stage, which is the paper’s focus. I welcome your comments, either publicly or privately.

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So, we've all heard theories about how fiduciary duties should run from directors to stakeholders, to employees, or even that these groups should be third-party beneficiaries of these duties.  How about this one:  fiduciary duties to a corporation should run from a plaintiffs lawyer in a derivative suit to the company the lawyer is suing?  This law.com article tries to describe the scenario.  Tenet Healthcare faced three suits; a suit for securities fraud, a derivative suit in federal court for breach of fiduciary duty, and a derivative suit in state court for breach of fiduciary duty.  Tenet was represented at least on the derivative suits by Skadden, Arps.  A judge stayed the state court suit pending action in the federal suit.  The plaintiff's attorneys in the federal suit, Cauley, Bowman, Carney & Williams, say that they diligently worked for two years to obtain a resolution in the federal case.   According to Cauley, Bowman, Tenet determined that the federal plaintiffs' demands were too high, turned to the state plaintiffs, and settled in one day.  This settlement provided the state plaintiffs' attorneys, Faruqi & Faruqi and Robins, Umeda & Fink with $5M in attorney fees.

So, everybody's happy except for Cauley, Bowman, who have lost in the "reverse auction" and receive no attorney fees for its work.  So, Cauley, Bowman is now suing the state plaintiffs' attorneys and Skadden, Arps under the theory that they all breached their duties to the company by settling too low.  If the case has any merit at all, the case must turn not on which plaintiffs attorney deserves the settlement or which firm worked longer or harder.  The case must turn on (1) the nature of the duty that the plaintiffs' attorneys owed to the corporation and (2) whether the settlement was reasonable.  Everything else is just part of the nature of the beast.

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On two occasions at the just-concluded Annual Meeting of the Association of American Law Schools, I experienced the jarring clash of ideology that divides business law professors. Last Wednesday, the first day of the conference, I attended the Section on Business Associations and the Section on Securities Regulation. At the same time, the Section on Socio-Economics was sponsoring an all-day series of panels, including "Corporate Governance, Fiduciary Duties and Social Responsibility" and "Control Fraud and the Market for (Financial) Lemons: Socio-Economics Perspectives on Corporate Looting." After a day full of fairly conventional discussions in the Section on Business Associations and the Section on Securities Regulation, I decided to attend this last session and was struck by the dramatic change in atmosphere as I moved from one group to the other.

The Section on Business Associations and the Section on Securities Regulation are dominated by free marketeers, while the Section on Socio-Economics has a high(er) concentration of progressives. There is, among this latter group, a pervasive sense that the corporate governance system is corrupt and that legal intervention would make the world a better place. Their discourse is Naderesque,* with hyperbolic caricatures of the status quo and urgent calls for reform. While the free marketeers tend to favor the descriptive, the progressives lean toward the normative.

I was surprised to find this same air of moral outrage the next morning in several presentations at the Section on Agency, Partnership, LLCs, and Unincorporated Associations, which sponsored a panel entitled, "What's Left of Fiduciary Duty?" Among some in this group, the word "contract" was articulated with venom, while Cardozo was exalted.

Unfortunately, I don't sense much real engagement across ideological boundaries. Perhaps surprisingly, given the usual portrayals of the legal academy, free marketeers dominate at elite law schools, and they can afford to ignore progressive critiques (or assign those critiques to footnotes). Progressives talk amongst themselves, reinforcing each other and becoming increasingly exasperated with the free marketeers.

* I met Ralph Nader for the second time while at the conference. He asked me about the panel on "Empirical Scholarship in Contract Law" and seemed genuinely interested. Unfortunately, I had to cut the conversation short so that I could make a lunch appointment. I would have enjoyed a more extended discussion.

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In his letter to the Time Warner board of directors released yesterday, Carl Icahn objects to Time Warner's exclusive negotiations with Google over AOL. Icahn argues that Google is the wrong strategic partner, and that a deal with Microsoft or Yahoo or eBay might unlock more value for Time Warner shareholders. Then he writes this:

On the eve of a proxy contest, I believe it would be a blatant breach of fiduciary duty to enter into an agreement with Google that would either foreclose the possibility of entering into a transaction that would be more beneficial for Time Warner shareholders or make such a transaction more difficult to achieve. (emphasis added)

Hmm. Icahn points to no conflicts of interest in this transaction. He simply claims that a Google transaction would be a bad idea. Here is some Fiduciary Duty 101: bad business decisions, even egregiously bad business decisions, are not actionable breaches of fiduciary duty. The business judgment rule would protect Time Warner's board of directors in this instance, even if they entered into a transaction that many people believed was substantively horrible.

Another aspect of Icahn's statement that I find interesting is that business people seem to have a more expansive notion of fiduciary duty than lawyers. If I am right about that, then fiduciary law may be working pretty well. Let me briefly explain why.

In this short symposium paper, I borrow from the work of Meir Dan-Cohen, Mel Eisenberg, and others to discuss the difference between "standards of conduct" [edited: see comments] and "standards of liability." The basic idea is that we want directors to hear this message: be diligent and make wise decisions. This is the standard of conduct. But we don't want to hold directors liable merely for a failure of diligence or wisdom. (Why? Two reasons: because we want directors to be bold and because we want to preserve the value of centralized decision making.) Before imposing liability, we want some evidence of wrongdoing, such as a conflict of interest. This is the standard of liability.

My sense is that many business people think about the standard of conduct when they contemplate fiduciary duties, even though they know about the standard of liability. Consider Icahn's concluding paragraph to the Time Warner board:

Once again, I am not opposed to the board using its business judgment to enter into a transaction with Google or another suitor so long as the transaction does not destroy or impede Time Warner's flexibility to unlock shareholder value in the near and long term. However, I want this letter to serve as notice to Time Warner's directors that if they enter into a transaction that has that effect, shareholders will seek to hold directors responsible. (emphasis added)

The reference to "business judgment" seems clear enough: he recognizes the board's legal authority to act in that sphere. So how will shareholders "hold directors responsible"? At the ballot box.

And this is as it should be.

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My fellow guest blogger, David Zaring, asks, "Should 'proactive' duties on be imposed on lawyers to investigate the financial statements of their clients?"  The short answer is, "no."  The longer answer is, "no -- and will we ever quit trying to saddle every person who comes into even the slightest contact with corporations with new responsibilities and/or fiduciary duties to protect us from these nefarious beasts?  What's next -- a duty that janitors root through corporate waste bins to ferret out securities fraud?"

I won't rehash the arguments, but there's some good stuff here and especially (it is his bete noir, after all) here.

As to David's other question -- how would such a duty affect lawyers' fees? -- I assume the question was rhetorical.   Of course such a duty would be a boon to lawyers.  The thing is, despite the phrasing of the question ("duties imposed on lawyers"), it's not the lawyers who would be saddled with a costly burden; it's the corporations.

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The Google Print litigation, and Eric Goldman's comment that by fighting the case, Google may put its entire business model in jeopardy, raises this question:

When should a firm literally bet the company in a lawsuit?  It's a question that technology firms deal with all the time; I remember having that phrase ("bet the company" litigation) and that question came up all the time when I was in private practice, and before I started representing technology firms.  (In fact, my first law firm sometimes liked to say, 'We specialize in that," tongue sort of in cheek.)  Is there research on point, and if so, where is it and what does it say?

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"Unlike ideals of corporate governance, a fiduciary's duties do not change over time." (2)

"Times may change, but fiduciary duties do not." (3)

These statements seem to have been intended to highlight the fact that Delaware is not going to create new avenues of liability to satisfy the post-Enron reformist impulse. Nevertheless, the notion that fiduciary duties are constant seems wildly out of place in this case, when all of us were wondering what to make of the duty of good faith and Chancellor Chandler is writing sentences like this: "The Delaware Supreme Court has been clear that outside the recognized fiduciary duties of care and loyalty (and perhaps good faith), there are no other fiduciary duties."

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According to the theory of the firm, the board is a mediating institution between "ownership" -- the shareholders -- and "control" -- management.  Shareholders will monitor the board to make sure that control does not get out of hand.  In theory, shareholders unhappy with the control of the firm with either exit by selling their shares or they will voice their opinion and attempt to reform the board.  This is mainly theoretical, as most shareholders' ownership is to dispersed for shareholders to either monitor or make their voices heard.

OK, enough of the primer.  Where is this going?  Today, the two dissident ex-directors of Disney, Roy E. Disney (nephew of Walt) and Stanley Gold filed a lawsuit against the board of directors for fraud connected with statements to shareholders about the next CEO, Robert Iger.  WSJ article here.  I have only superficially kept up with the Disney goings-on the past two years and the efforts of Roy Disney and Stanley Gold to mount various shareholder campaigns.  But, when I mentioned this development to shall we say "corporate law professors," their reaction was disdain.  "Oh, those two."  The official Disney position is "The record of strong performance of The Walt Disney Company speaks for itself, and this frivolous and baseless lawsuit reflects the mean-spirited, self-serving interest of two ex-board members."

So, let me pose a question.  (I know that rhetorical questions are lazy ways to make an argument, but it's 9:45, and I'm sort of tired.)  If we structure corporate law around many assumptions, including one that shareholders will monitor the board, then why are we so annoyed by large shareholders that actually do monitor?  Go check on any corporate law blog, and you'll see that commenters get annoyed at other attempts at monitoring, such as when CalPers gets a bee in its bonnet.  Is it because by the time a shareholder becomes so large to have a voice and the motivation to use it, we question that motivation?  Can a shareholder ever have a pure enough, yet large enough, motivation to monitor that we would listen?

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On Monday I presented a lecture on the topic of "Fiduciary Law & Entrepreneurship." Here is the introduction:

In a series of articles beginning in 1997, economists Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (“LLSV”) created a sensation among legal academics by proposing that “countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets.” As if that were not enough, LLSV then took their speculations a step further. Relying on evidence that robust capital markets contribute to economic growth, LLSV concluded that legal protections for minority investors are linked to economic development.

Subsequently dubbed the “law matters” thesis, the link between legal protections for minority investors and economic development has remained enticing to legal scholars, despite withering attacks on LLSV’s methodology. While LLSV approach legal issues with breathtaking naiveté, my purpose today is not to attack their methodology, but to examine their logic and to theorize about possible links between fiduciary law and entrepreneurship. In other words, I ask the question: does fiduciary law matter to entrepreneurship?

The role of fiduciary law in the LLSV story is unclear. Indeed, they do not mention the word “fiduciary” at all, at least in their initial articles on law and finance. Nevertheless, I think there is widespread agreement among legal academics that legal protections for minority investors must include fiduciary duties. My lecture was the first step in an attempt to describe the role, if any, played by fiduciary law in economic development.

I am a skeptic on many grounds, but two stand out. First, the connection that LLSV hypothesize entails an assumption that common law systems offer minority investors more protections than civil law systems offer. Subsequent work by other economists has explored various possible reasons that this might be true. Among those is the notion that common law courts are more adaptable than civil law courts. Although this is the stereotype, I have my doubts based on many conversations with civil lawyers. I am currently working on another project in which I hope to explore that issue more systematically.

Second, even if common law courts can be shown to be more flexible than civil law courts, there remains the important issue of whether common law judges will use that flexibility to protect minority stockholders. Why LLSV assume that courts will act in this way is unclear. Moreover, if you have studied Delaware corporate law at all, you probably recognize that the assumption of a minority-leaning judiciary is highly suspect.

I could say a lot more, but I plan to write something about this, so I will save the rest for the paper.

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I usually stay away from discussions of the Duty of Care, but Prof. Ribstein is asking why more airlines don't hedge the price of crude oil.  Because airline prices and profits are so sensitive to the price of crude oil, an airline with an effective hedging program could do well -- example Southwest Airlines.  Larry had opined before that management may be content to pass higher fuel costs on to the consumer, especially in an industry where everyone did the same.  However, with Southwestern Airlines, a famously profitable airline, showing off its hedging strategy, that lackadaisical attitude, a vestige of regulated times, may be hard to maintain.

In the Hamilton & Booth Corporation Finance text, the authors included an Indiana case (Brane v. Roth) in which a court sided with shareholders and held that a grain co-op breached the duty of care by failing to hedge against the price of grain.  (I remember the cases where shareholders rebut the BJR because they are so few and far between!)  This case is unique because the only business the co-op engaged in was the buying and selling of grain.  One could argue that an airline has other inputs that affect the bottom line, so failing to hedge one input might be more of a judgment call and not one of "gross inattention."  In addition, the only business of the farmer shareholders was in producing grain, so the shareholders were not as able to diversify their own risk as most shareholders are.

But, it is fun to think about whether failing to hedge is a breach.  The notes to the case state that "Brane is an unusual case in that the manager [non-shareholder, non-farmer employee] apparently did not have much incentive to reduce risk."  Does the management of a large airline have an incentive to reduce risk if (1) compensation is tied to upside, not downside; and (2) the fuel cost is passed on to consumers?  Complete hedging gets ride of the downside of an input, but it also cuts the upside.   Were airlines hoping that fuel prices would go down and did not want to be locked in to a hedge?

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I just returned from the University of Minnesota, where I participated in Super CLE Week XXV. That's six hours (!) of lecture on "Recent Developments in Corporate Fiduciary Law." Disney, Martha, Oracle, Omnicare, etc. You cannot spend that much time thinking about the Delaware cases without making some new connections, and once I recover my senses I will attempt to share some new thoughts.
 

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In the late 1990s, four economists -- Rafael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, and Robert W. Vishney (LLSV) -- published a series of studies that together placed on the table the "law matters" hypothesis. The findings at the heart of the law matters hypothesis link legal protections for minority stockholders to strong stock markets and suggest that common law legal systems provide better legal protections for minority stockholders than civil law systems. According to LLSV, one of the critical aspects of common law protection is fiduciary duty: "The vague fiduciary duty principles of the common law are more protective of investors than the bright line rules of the civil law, which can often be circumvented by sufficiently imaginative insiders."

Even those who disagree with LLSV, and there are many, pay homage to the role of fiduciary duty in protecting minority stockholders. The following passage comes from Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, and Mark D. West in an article entitled The Evolution of Corporate Law: A Cross-Country Comparison, 23 U. Pa. J. Int'l Econ. L. 791 (2002):

Our argument differs from the one put forward by LLSV. They purport to show that common law jurisdictions have stronger protection of minority shareholder rights than civil law countries. A closer examination of the origins of these protections and the time they were adopted in England, the mother country of the common law, however, has shown that it is hard to make a case that these are in fact genuinely common law type provisions. We have also demonstrated that with regard to legislated controls of shareholder rights on the books, Delaware has indeed followed a race to the bottom as proposed by Cary many years ago. That, however, does not necessarily imply that Delaware law does not protect shareholder rights. In fact, the Delaware example is a glaring example for how misleading assessments of law might be that rely only on a handful of indicators. Effective protection is the result primarily of strong courts that have upheld the principle of fiduciary duty as the threshold for permissible actions by directors. Procedural rules that encourage litigation and the structure of the chancery court have allowed the effective handling of litigations by judges who specialize in corporate law. Delaware courts in combination with a strong securities market regulator have provided the institutional background against which a highly enabling law has given corporations ample room to experiment with the optimal allocation of control rights between shareholders and management. Seen in this light, the problem of civil law countries has been not so much to offer only weak corporate law protection, but to prevent legal innovations by imposing straightjackets of mandatory legal constraints on companies.

But is it true that Delaware offers strong protections for minority stockholders? This is a big question, and I do not purport to provide a complete answer here. My hunch is that common law courts generally do better than civil law courts at filling gaps in the investment relationship through fiduciary law. (And, yes, civil law countries do have fiduciary law, contrary to widely held belief.) Of course, common law courts need to do more if the statutes are enabling as opposed to regulatory.

The more important question, however, is whether common law courts do enough to inspire minority investment. In other words, can we attribute the success of dispersed ownership in the United States to common law courts, notably Delaware? Interestingly, Delaware provides very weak fiduciary protections for minority stockholders in closely held corporations. The law of minority oppression in Delaware is notoriously limited.

But the focus of LLSV is on the connection between minority stockholder protection and stock markets (i.e., not closely held corporations). Perhaps the protection is stronger in that context? While it is true that Delaware offers a robust fiduciary law for situations confronted by public corporations, it would be a stretch to claim that such law is strongly protective of minority interests, at least if you confine yourself to looking at the direct outcomes of cases. Most cases are settled with little or no compensation to stockholders. As for the cases that go to trial, directors win a large percentage.

Nevertheless, one might argue (and I have a lot of sympathy for this argument) that the effect of fiduciary law goes well beyond actual case outcomes. Even if stockholders are not fully compensated for director malfeasance, the threat of director liability might be sufficient to deter misconduct. I hope this is true, and when I am in a good mood, I actually believe it. Though note that it is different from what LLSV have argued, and I wonder why the civil law would be less deterrent.

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After reading my last post, Leo Strine reminds me that he has written about the empirical foundations of fiduciary law in an article entitled, The Inescapably Empirical Foundations Of The Common Law of Corporations, 27 Del. J. Corp. L. 499 (2002).

He writes:

The adjudicative process obviously hampers the judge's ability to put her hands on an unbiased, and sufficiently thorough, sample of the literature, much less to understand it fully. The joyous and, at times, maddening complexity of the human experience confounds the ability of social science to describe the way things are with the certainty that is often achievable in some aspects of the natural sciences. Judges reviewing a skewed and incomplete body of difficult-to-understand social science articles whose composition is shaped largely by time-pressured personal research and citations by self-interested litigating adversaries must proceed with some hesitance. When possible, empirical evidence should be presented through live, expert testimony so that the judge can go beyond the cold page to an active dialogue with the social scientists on both sides of the question, aided by adversarial examinations. Even when that technique is used to improve the judge's ability to assess empirical claims based on social science research, common sense and modesty still counsel against the adoption of eternal verities supposedly premised on the latest in financial scholarship. These factors do not, however, weigh in favor of judicial isolation from information about the real world. Nor do they support acts of judicial obscurantism, in which judges rest their decisions on their "discovery" of rules of decision within prior precedents, thereby suppressing the empirical and normative foundations of their judgments. Neither option changes the fact that common law decisions rest on empirical assumptions by particular judges about how the world works, and normative choices reflecting those judges' beliefs about how best to address the reality they perceive.

The topic is an old one. I remember writing a paper in law school (for a seminar on judicial process by Frank Easterbrook) on the use of empirical evidence by courts. Although the value of empirical evidence may seem obvious, the institutional limitations described by Leo are real and substantial. In my view, that is all the more reason for corporate governance scholars to do some of the heavy lifting in advance. Simply stated, we need more and better studies of boards.

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What is the most famous footnote in the history of law? Footnote 4 of Carolene Products? Maybe. Though I would vote for footnote 11 of Brown v. Board of Education, in which Chief Justice Warren cites several sociological studies purporting to demonstrate that that segregation could negatively affect African-American children. Empirical evidence. What a concept!

Much of fiduciary law is built on behavioral assumptions, most of which are not expressly supported by any evidence other than casual observation. In his excellent opinion in In re Oracle Corp Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003), my friend and former Skadden colleague Vice Chancellor Leo Strine discusses the decisions confronted by special litigation committees and ponders several behavioral questions:

In evaluating the independence of a special litigation committee, this court must take into account the extraordinary importance and difficulty of such a committee's responsibility. It is, I daresay, easier to say no to a friend, relative, colleague, or boss who seeks assent for an act (e.g., a transaction) that has not yet occurred than it would be to cause a corporation to sue that person. This is admittedly a determination of so-called "legislative fact," but one that can be rather safely made. Denying a fellow director the ability to proceed on a matter important to him may not be easy, but it must, as a general matter, be less difficult than finding that there is reason to believe that the fellow director has committed serious wrongdoing and that a derivative suit should proceed against him.

The difficulty of making this decision is compounded in the special litigation committee context because the weight of making the moral judgment necessarily falls on less than the full board. A small number of directors feels the moral gravity � and social pressures � of this duty alone.

Like most judges, Leo makes these assertions without a shred of empirical support. But at least he is self-conscious about it. He writes this in footnote 60 of that case:

The parties have not cited empirical social science research bearing on any of the factual inferences about human behavior within institutional settings upon which a ruling on this motion, one way or the other, necessarily depends.

If I am reading this correctly, Leo is not merely bemoaning the absence of empirical data in this case, but also inviting future litigants to supplement their arguments with such data. And as far as I can determine from the reported decisions, no one has taken him up on the offer. Even if the litigants drop the ball, those of us who study the legal obligations of directors should do better on this front.

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From time to time, I hear pharmacists clamoring to be more involved in their patients' health care decisions. Today I read this:

Pharmacists, frustrated with being viewed as mere pill-pushers, are clamoring to become more involved in managing their customers' health care. Some professional groups have been pushing for a new category of non-prescription drugs, dubbed "behind-the-counter," that would require customers to talk to a pharmacist before buying them. The United Kingdom and Canada are among a number of other countries that have such a setup.

File this under "Be Careful What You Ask For."

Whether fiduciary law governs relationships between pharmacists and their customers is an open question. Courts are notoriously imprecise in explaining the boundaries of fiduciary law, and the overlaps between fiduciary law and law governing confidential, but non-fiduciary, relationships is substantial. Moreover, the number of cases in which pharmacy customers bring fiduciary claims against their pharmacists is currently quite small. But consider the reasoning of Anonymous v. CVS Corp., 188 Misc.2d 616, 728 N.Y.S.2d 333 (N.Y.Sup.,2001), a case involving the alleged disclosure of confidential medical information:

While the role of a pharmacist may not equal that of a physician treating a patient, surely access and the right to collect private medical information on one's customers does not make a pharmacist merely "the dispenser of a commercial product." (See, Lutz v. Houck, 263 N.Y. 116, 188 N.E. 274 [1933] where the New York Court of Appeals distinguished the role of pharmacists from that of a drug store owner). The pharmacist has vastly superior knowledge of pharmaceuticals, a highly specialized type of goods with the potential to cause great harm to customers. Customers must place some degree of trust and confidence in the pharmacist filling their prescriptions. The transaction between a pharmacist and customer involve the principal characteristics of a fiduciary relationship--dependency and influence.

Although the case was about wrongful disclosure of confidential information, the court's reasoning would extend to many fact situations beyond that. "Dependency and influence" are common markers of fiduciary relationships, and pharmacists who become medical advisors ramp up both attributes. So when I hear pharmacists lobbying for a larger role in patient decisions, I also hear lots of new lawsuits.

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The Epinions Shareholder Lawsuit

If you have ever gone to Epinions to help decide what consumer product to buy, then you may be interested in this new lawsuit. The fact pattern is pretty involved, so bear with me. I've gotten most of the facts from the complaint and from a former employee/shareholder, but more facts may come out once the answer is filed. The crux of it is that in a merger with DealTime (Shopping.com) that preceded last Fall's successful IPO, the Epinions common got washed out, and now they are fighting mad.

Epinions was founded in March 1999, and financed its operation with three rounds of venture capital financing over the next two years, totalling $43 million. Various financial firms were involved, but the largest two were able to nominate three directors to the five member board. Even with this financing, Epinions tumbled with the rest of the market between 2000-2002 and experienced large layoffs. The VCs were getting a little nervous that they would not get paid back. The details of their preferred stock stipulated that in the event of a merger or liquidation, the first $45 million went to the preferred. Epinions had two acquisition offers (from Google and Yahoo), but the offers were half of that nut or less. The board eventually agreed to an acquisition by DealTime in late 2002. The offer was for less than the $45 million, so only the preferred would get compensation for the shares (some cash and stock in the new company), but the common would not get anything. But, the common stock had to vote (60%) for the merger. The stock was well concentrated, so really only one or two people had to be convinced that the merger was in the best interest of the company. The board assured the common stock owners that this was the best deal that they were going to get and keep the company as a going concern. Some of the common shareholders affected were employees, but some were not. The deal went through in April 2003. The preferred stockholders were given stock or vested options in the new company.

In October 2003, the new company changed its name to Shopping.com, and on March 23, 2004, this company announced its IPO, which closed on October 24. The complaint alleges that the vested options given to the preferred stockholders was then worth $250 million.

The shareholders have multiple theories of recovery relating to alleged breaches of fiduciary duties by the board. The shareholders allege that the board knew of certain information that would make the company more profitable in the near future, but did not communicate that to them. We will have to see how that plays out. The shareholders also allege that the valuation of the company below $45 million was wrong, but I'm not sure that their analysis is valid. The plaintiffs base their valuation on the valuation of the combined company. For example, if Epinions was 35% of the resulting company, and the resulting company was worth X, then Epinions was worth .35X. However, the value of Epinions must be calculated by looking at Epinions standing alone, without looking at the resulting company. Theoretically, the merger should create value and make .35X be greater than the value of Epinions. Again, I'll be interested to see how that plays out.

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The most entertaining presentation that I saw at the AALS conference was by Sean Griffith of the University of Connecticut School of Law. It was entertaining because he used the thaumatrope as a metaphor for Delaware's development of the fiduciary duty of good faith. (After recovering from a PowerPoint mishap, Sean displayed the thaumatropes from the site linked above.) While Sean comes as close as anyone I have seen to capturing the essence of the Disney decision, he fails to develop some important insights that should follow from the thaumatrope metaphor.

Sean argues that "good faith" is a rhetorical device oscillating between the traditional duties of care and loyalty. This is his description from the paper:

The Disney opinion clearly resembles a thaumatrope. On one side of the card, Chancellor Chandler emphasized facts raising issues under the duty of loyalty and, on the other, facts raising issues under the duty of care. When he spun the card, the thaumatrope produced an image of a very bad board of directors, which the Chancellor found may well have violated their duty of good faith.... The image of good faith ... is not a new and distinct doctrinal pillar. It is, instead, the middle-space between the twin doctrines of care and loyalty.

This is an interesting point, but I can't help thinking that Sean missed the most interesting part. Disney and its modern companions are not the only thaumatropes in Delaware corporate law. Indeed, the oscillation between care and loyalty that Sean describes is very apparent in Smith v. Van Gorkom, the infamous 1985 case in which the Delaware Supreme Court found the board of Trans Union "grossly negligent" in a friendly merger. Sean notices the similarity between Disney and Van Gorkom, but treats Van Gorkom as a straight duty of care case. In my view, the most interesting question raised by Sean's analysis is this: Why do the Delaware courts use this "thaumatropic" analysis in both Disney and Van Gorkom?

The answer to that question may be relatively straightforward: the Delaware courts have recognized the strong reasons to avoid second quessing directors for innocent mistakes in judgment, but there is no justification for ignoring self-interested behavior. Disney and Van Gorkom are both cases in which the duty of loyalty was ruled out, but both boards appeared to have structural conflicts. In these circumstances, the Delaware courts use egregiously bad decisions as evidence of misconduct. (The Delaware courts have another set of rules that take account of structural bias in takeover defense cases through Unocal.)

When I wrote about the Disney decision here over a year ago, I characterized it as "simply a reinvigoration of substantive due care." I changed my mind about the case when I taught it again last spring, and I now read the case as a modern version of Van Gorkom. Read Sean's paper for more interesting thoughts about why the Delaware courts would wait so long before re-invigorating Van Gorkom-type liability.

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Steve Bainbridge has written in response to my post on the Fiduciary Duty of Good Faith. Simply stated, Steve's post is brilliant! If you are interested in understanding this development in Delaware corporate law, check it out.

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The so-called "fiduciary duty of good faith" is hot. In the last couple of months, I have received two working papers from professors who are trying to explain the Delaware Court of Chancery's opinion in the Disney litigation. In addition, a student on the Wisconsin Law Review has asked for my help on a note with regard to that case. Then this morning, I spent over an hour with another student who wanted to write a class paper on good faith. This is a tough issue, but I think I have it figured out. So listen closely; I'm only going to say this once.

You are probably familiar with the facts that led to the Disney litigation. After losing number-two-man Frank Wells to a helicopter crash and two other senior executives -- Jeffrey Katzenberg and Richard Frank -- to other corporations, Disney CEO Michael Eisner hired Michael Ovitz to become the second-in-command. Ovitz's employment agreement was approved by Disney's compensatoin committee, which had hired Graef Crystal for (worthless) advice. To make a long story short, neither the committee nor Crystal ever computed the amount that Disney would be required to pay Ovitz in the event of a non-fault termination. When Ovitz left the company 14 months later pursuant to a non-fault termination agreement, he took with him a severance package with about $140 million. Understandably, shareholders were upset. Some of them sued.

In the first round of litigation, the Delaware Supreme Court affirmed the Chancery Court's dismissal of the compaint -- which the Court called a "blunderbuss of a mostly conclusory pleading" -- but allowed the plaintiff to file an amended complaint with respect to the waste claim. Brehm v. Eisner, 746 A.2d 244 (Del. 2000). A claim for waste describes, in simplest terms, "'an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." Glazer v. Zapata Corp., Del.Ch., 658 A.2d 176, 183 (1993).

If ever the facts supported a claim of waste, this was the case, and the Delaware Supreme Court was unable to bring itself to dismiss the claim without giving the plaintiffs another bite at the apple. Importantly, the Court also obliterated the notion of "substantive due care":

As for the plaintiffs' contention that the directors failed to exercise "substantive due care," we should note that such a concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify directors' judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule. Irrationality may be the functional equivalent of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.

This passage is crucial to understanding what subsequently happened to the doctrine of good faith in Delaware. Although the Court does not like the phrasing, "substantive due care," the idea underlying that notion remains intact. In the future, we are told, litigants and courts should call it "waste" or "bad faith."

When the case returned to the Court of Chancery, therefore, the "fiduciary duty of good faith" became the focus and was equated with something akin to irrationality. Chanceller Chandler described a board that had made no attempt at all to fulfill its obligations. (One might say that the directors acted irrationally in the sense that their failure to act could not be explained.) In Chandler's own words:

These facts, if true, do more than portray directors who, in a negligent or grossly negligent manner, merely failed to inform themselves or to deliberate adequately about an issue of material importance to their corporation. Instead, the facts alleged in the new complaint suggest that the defendant directors consciously and intentionally disregarded their responsibilities, adopting a "we don't care about the risks" attitude concerning a material corporate decision. Knowing or deliberate indifference by a director to his or her duty to act faithfully and with appropriate care is conduct, in my opinion, that may not have been taken honestly and in good faith to advance the best interests of the company. Put differently, all of the alleged facts, if true, imply that the defendant directors knew that they were making material decisions without adequate information and without adequate deliberation, and that they simply did not care if the decisions caused the corporation and its stockholders to suffer injury or loss. Viewed in this light, plaintiffs' new complaint sufficiently alleges a breach of the directors' obligation to act honestly and in good faith in the corporation's best interests for a Court to conclude, if the facts are true, that the defendant directors' conduct fell outside the protection of the business judgment rule.

And thus we see that the new formulation of the fiduciary duty of good faith is nothing new at all, but simply a reinvigoration of substantive due care. I say "reinvigoration" because substantive due care has long been considered a moribund doctrine, but this new duty of good faith could have legs. At a minimum, we see a dramatic change in the tone of the Court of Chancery, which had until this case treated the fiduciary duty of good faith with some disdain. See, e.g., Emerald Partners v. Berlin (Del. Ch. 2001) ("Although corporate directors are unquestionably obligated to act in good faith, doctrinally that obligation does not exist separate and apart from the fiduciary duty of loyalty. Rather, it is a subset or 'subsidiary requirement' that is subsumed within the duty of loyalty, as distinguished from being a compartmentally distinct fiduciary duty of equal dignity with the two bedrock fiduciary duties of loyalty and due care.").

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Does anyone else remember this song from Sesame Street? (My children are amazed that I was alive when Sesame Street was created. Now, it is so old!) Legal scholars often view business relationships as bundles of conflicts. The role of law is to mitigate conflicts. We are fascinated by the mechanisms created � both privately by the parties to a transaction and by public law � to address potential conflicts by creating incentives for all parties to act in harmony. In the end, however, we recognize that in a world where individuals seek their own self-interest, conflicts persist.

What would an ideal business relationship look like? I assume it would be one in which conflict is replaced by cooperation. The real world is certainly filled with such relationships, but they remain something of a mystery to economists, who assume the worst forms of self-interest seeking. The key to unlocking the mystery lies not in law, but in something less discernable � call it culture or ethics or values. In the end, the creation of cooperative relationships relies on a shared willingness among the participants to sacrifice self to the greater good.

This ethic of selflessness is much discussed in the law governing business organizations. The best-known articulation comes from Cardozo, who spoke of the fiduciary duty owed by one �co-adventurer� in a business to another as a �punctilio of the honor the most sensitive.� Enforcement of Cardozo�s aspiration, however, has proven elusive, and is widely viewed as an undesireable constraint on the ability of parties to enter business relationships. Why are we incapable of creating cooperative relationships by force of law alone? Stated another way, why is Cardozo�s view of fiduciary duty vacuous?Given that cooperative relationships exist, what is the role of law? One might be tempted, along with Madison, to assume that if we were all angels, law would be superfluous. But even angels abide by law.

Thomas More recognized that cooperation requires extralegal influence:

Nature calls all men to help one another to a merrier life. (This she certainly does with good reason, for no one is raised so far above the common lot of mankind as to have his sole person the object of nature�s care, seeing that she equally favors all whom she endows with the same form.) Consequently nature surely bids you to take constant care not so to further your own advantages as to cause disadvantages to your fellows.

Therefore they hold that not only ought contracts between private persons to be observed but also public laws for the distribution of vital commodities, that is to say, the matter of pleasure, provided they have been justly promulgated by a just king or ratified by the common consent of a people neither oppressed by tyranny nor deceived by fraud. As long as such laws are not broken, it is prudence to look after your own interests, and to look after those of the public in addition is a mark of devotion. But to deprive others of their pleasure to secure your own, this is surely an injustice. On the contrary, to take away something from yourself and to give it to others is a duty of humanity and kindness which never takes away as much advantage as it brings back. It is compensated by the return of benefits as well as by the actual consciousness of the good deed. Remembrance of the love and good will of those whom you have benefited gives the mind a greater amount of pleasure than the bodily pleasure which you have forgone would have afforded. Finally � and religion easily brings this home to a mind which readily assents � God repays, in place of a brief and tiny pleasure, immense and neverending gladness.

Food for thought.

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