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Cardozo Law Review

Abstract

This Article assesses a fundamental puzzle concerning directors' fiduciary duties. While courts have gradually refined the content of fiduciary duties, they have yet to determine which parties are the beneficiaries of these duties. In the standard Delaware pronouncement, directors owe their duties to "the corporation and its shareholders." Since the interests of the corporation and its shareholders will diverge in various settings, this is at best an indeterminate legal doctrine. The puzzle is that this indeterminacy remains an ongoing feature of the law, rather than a temporary area of uncertainty. Why don't the courts pick just the shareholders, or just the corporation?

In order to better understand why the courts might select ambiguity, this Article will focus on the practical effects of the existing doctrine. An underappreciated feature of the current ambiguity is that it facilitates dynamic fiduciary duties. The broad range of judicially endorsed beneficiaries gives directors a variety of legitimate interpretations among which to choose. Directors are likely to develop their own interpretations of the correct fiduciary beneficiary from within that range, and these interpretations will inevitably shift over time. In short, a key feature of fiduciary duties is that they are read differently across time and between firms.

This dynamism of fiduciary duties might be accounted for in terms of political convenience, or judicial compromise. But there is another possibility. This Article will explore whether the uncertainty of fiduciary beneficiaries could be understood as a desirable legal outcome. Two hypotheses will be considered. First, it may be that dynamic fiduciary duties follow predictable patterns, reflecting the allocations of bargaining power among corporate constituents. This would suggest that directors' fiduciary duties are a "bargain-mimicking" default rule. Under limited circumstances, this hypothesis may be accurate. In the ordinary case, however, a bargain-mimicking account would likely fail.

Second, dynamic fiduciary duties may provide for variation in outcomes. This hypothesis is more promising. On this account, dynamic fiduciary duties may be a way to experiment with legal options - i.e., individual firms may be "laboratories of corporate governance." This idea fits well with an evolutionary account of business strategy. In effect, those firms which adopt the most efficient fiduciary duties for their circumstances (whether in terms of a firm's stage of existence, industry, or other features) are more likely to survive, or succeed in comparison to others. Dynamic fiduciary duties may then be a means to develop desirable forms of fiduciary duty in a context where courts, and even boards, are unlikely to come up with these answers on their own.

Disciplines

Law | Legal Profession

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