August 10, 2005
What's left of fiduciary duties?
Posted by Account Deleted

I want to step back a little and see where this case leaves us in terms of directors’ fiduciary duties. 

There seems to be general agreement that, although the Chancellor acknowledged and attempted to define the good faith duty, his holding, based on the facts of this case, didn’t leave much room for it to operate. 

We already know that there’s no real duty of care left.  This, by the way, takes care of the Caremark duty. Though I realize the Chancellor nodded to it a couple of times in the opinion (three, to be exact), it’s hard to see where it fits with the kind of conscious indifference the Chancellor was requiring.   Even where the board actually sees a chief executive messing up, the court’s holding on the Ovitz termination suggests that the board need not intervene if the ceo has the power to make the decision.

So this leaves the duty of loyalty.  This is consistent with the analysis of fiduciary duties in my article, Are Partners Fiduciaries? 2005 U.Ill. L. Rev. 209, which shows how the fiduciary duty is, simply, a duty of unselfishness.

The opinion suggests that courts may end up using good faith to expand the kinds of conflicts that might give rise to a duty of loyalty.  So the focus from now on will be solely on conflicts.  The substance and procedure of board decisions will be relevant only in limiting the circumstances in which managers will be liable for conflict of interest.

One implication of this, as I have discussed in my article, Accountability and Responsibility in Corporate Governance, is that corporate social responsibility is basically irrelevant to corporate governance law.  Since managers are not liable unless they’re conflicted, they have the power to decide whether to help society or not.  It’s possible, but unlikely, that a court would hold that a “social” objective supplies a relevant conflict.

A corollary is that the whole idea of duties to creditors in the near-insolvency situation is also irrelevant.  (This is an issue I plan to address for the Maryland conference on this issue in November). Again, the board can do what it wants, including helping creditors, or not, unless it’s conflicted.  So the board can take an action that may not serve shareholder interests, whether or not it serves creditor interests.  Obviously the board  can serve shareholder interests, though there may be a question whether a broad interpretation of the credit agreement justifies a duty in the “penumbra” of the agreement.

So now we can get down to what really matters.  The most important words in the opinion, in my view, are these, near the beginning of the opinion (slip, p. 4):

The redress for failures that arise from faithful management must come from the markets, through the action of shareholders and the free flow of capital, and not from this Court.

What could be clearer?  If managers are "faithful," they're not liable.  Period. End of story. You can fire them, reduce their pay, whatever, but don't run to the court for help.


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