Conflict of interest Essay
A Multi-Jurisdictional Review of the Directors’ Relationship to the Corporation Carol Hansell and Laurence Hazell I The corporate model separates ownership from control. The delegation of control over the corporation’s assets by its owners means that effective corporate governance comes down to the appropriate motivation and good behavior of a company’s board and management.
The imposition of fiduciary duties is how the common law responds to this delegation of authority to those two groups: to ensure that they act in the best interests of the company and its shareholders when making decisions about the actions the corporation will take. So a fiduciary relationship implies vulnerability and dependency on the part of the beneficiaries (the corporation and its owners) and the potential for the fiduciaries (the directors and officers) to manipulate the powers of the corporation for their own benefit.
It is a balance between principles of trust upon which the fiduciary duty is based and the need to allow the board and management to take risks with the corporation’s assets to fulfill the expectations of the investor owners who made their investment in the expectation of profiting from it. II Although fiduciary institutions existed in Roman law (fiducia) and in Germanic customary
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Consequently the fiduciary duties developed by the law of trusts in common law countries, and more particularly as these relate to the duties of directors, are essentially unknown in civil law jurisdictions. But, not surprisingly, there are parallels between the responsibilities that corporate directors owe to companies in these traditions and those developed by their common law cousins. Indeed, the Latin root of the word fiduciary – fiduciarius – means one in whom trust – fiducia – reposes.
Legal usage in many jurisdictions also developed an overlay – an implication – of a particular relationship of confidence between the fiduciary and those who had placed their trust in that person. Examples of such relationships in either Tor #: 1322648. 1 DRAFT: FOR DISCUSSION PURPOSES ONLY III As the papers in this collection will illustrate, recent initiatives in corporate governance reform in a number of civil law countries emphasize the same basic governance precepts encompassed by their common law counterparts.
While many think the jury is still out on whether this amounts to an emerging consensus on what constitutes good corporate governance, there does appear to be a growing accord about what counts as best practice in the modern corporation. In this regard it is important to note that while we provided a ‘template’ to assist contributors in organizing their thoughts we have not sought to homogenize these contributions through the editorial process.
Rather, their individual styles of expression tell their own story about how fiduciary duties – or their civil law equivalents – are perceived in each contributor’s country. What we have tried to do is demarcate and clarify where other areas of law, such as the closely related duties of skill and care, or insolvency law, securities law, the law of contract and matters like workplace safety and environmental issues impinge upon the corporation and its stewards.
However, it has to be borne in mind that in the particular case of this jurisdiction or that, these distinctions may not amount to a difference where the duties of a company’s stewards are concerned. But, since that is a part of the story, it needs to be told as well. What the authors try and elicit in each of these studies is how the individuals who fall within the purview of these duties rank and/or reconcile the oftencompeting interests faced by the corporation, its shareholders and other stakeholders. It is time to let the studies speak for themselves.
Readers may ask why is this or that country not included? It is a fair question. This project really has been a coalition of the willing, but we see it as the first act of an ongoing effort. So those with an interest in contributing new jurisdictions are welcome, in fact we there are some still in the pipeline, and of course, those already represented here will need to be updated – as ideas become initiatives and then become law, regulation, accepted wisdom and perhaps later still, the wrongheaded thinking of heretofore.
DRAFT: FOR DISCUSSION PURPOSES ONLY system include guardianship, curatorship and the relationship between a lawyer and her client. Special obligations were imposed upon these fiduciaries to ensure that no improper influence affected their decisions as they administered the property or the confidences of those who reposed their trust in them. International Developments Sub-Committee on Corporate Governance Fiduciary Duties Under U. S. Law Ira M. Millstein Holly J. Gregory Ashley R. Altschuler1 Weil, Gotshal & Manges LLP I. Introduction A. The U. S.
Corporate Form In the United States, a corporation is a legal entity, separate and distinct from the persons who own it, created by law for the purpose of carrying on business. The owners of the corporation are its shareholders. In a public company, unless the owners choose otherwise, shares in the corporation ordinarily are freely transferable. The shareholders elect the board of directors of the corporation. The directors, who have a fiduciary relationship with the corporation and its shareholders, are responsible for the overall direction and management of the corporation.
The board of directors delegates the duties of day-to-day management of the corporation to various executives, who the board (not the stockholders) select and who are accountable to the board of directors, and in some circumstances, have a direct fiduciary relationship with the shareholders. David Murgio and Jane Pollack of Weil, Gotshal & Manges LLP assisted in preparing this submission, and they have the authors’ gratitude. For example, Section 141(a) of the Delaware General Corporation Law provides that “[t]he business and affairs of every corporation . . . shall be managed by or under the direction of a board of directors .
”DRAFT: FOR DISCUSSION PURPOSES ONLY AMERICAN BAR ASSOCIATION In the U. S. , the corporation exists only by virtue of law and owes its existence to its state of incorporation. Thus, the corporation has only those powers conferred upon it by the general corporation law of its state and its articles of incorporation. 3 Statutory corporation law, however, is “incomplete” in the sense that neither it, nor most statutory law, can explicitly cover all the contingencies and varying factual circumstances that occur in every day corporate activity.
For example there are a myriad of means by which minority shareholders can be oppressed or taken advantage of by “controlling” shareholders. 4 If the law is to be “complete” — that is, available to redress wrongs not explicitly covered by the words of the statute but nevertheless within the purport of the statute — the courts must be available, and there must be some standard by which to judge whether a complaint is actionable. The standard evolved in most U. S. jurisdictions is a “fiduciary duty” standard that is a duty owed to the shareholders by the management and the board of directors.
As U. S. corporations are creatures of the law of the state of their incorporation, fiduciary duties, in theory, are different in every U. S. jurisdiction. But because over 40 percent of the corporations listed on the New York Stock Exchange and a majority of the publicly traded Fortune 500 companies are incorporated in Delaware, Delaware is the preeminent state in corporate law and fiduciary duties, and has been for 3 1 Corporation Practice Guide 1103, 1201-02 (Kenneth J. Bialkin et al. eds. , Aspen Law & Business, 1997); Dennis J. Block, Nancy E.
Barton, Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors 2 (5th ed. 1998) (hereinafter, “BJR”). By definition, a controlling shareholder possesses either: (1) ownership of or the unrestricted power to vote more than 50 percent of the corporation’s outstanding voting securities; or (2) actual control over a majority of the board of directors. See Emerald Partners v. Berlin, 726 A. 2d 1215, 1221 n. 8 (Del. 1999). Tor #: 1308665. 3 4 2 DRAFT: FOR DISCUSSION PURPOSES ONLY B. The Role of State Law and the Preeminence of Delaware
Court of corporate law,” with many states adopting or looking to Delaware law to govern transactions involving non-Delaware corporations. 6 Accordingly, Delaware law forms the backbone of U. S. fiduciary duty law. 7 As in all U. S. jurisdictions, Delaware corporate law is a function of both statutory and common law. For over one hundred years, the Delaware state legislature has created and maintained a modern, flexible corporate code – the Delaware General Corporation Law (“DGCL”) – which continuously is revised to make corporate transactions easier to accomplish.
The large variety of transactions permitted by the DGCL also have created numerous fiduciary obligation questions, which the Delaware courts have been called upon to resolve. 8 Sometimes, the Delaware courts, by their fiduciary duty opinions, restrict corporate transactions that would otherwise be permissible under the DGCL. It is against this juxtaposition of statutory and common law that Delaware, as well as most other U. S. jurisdictions, has created a contemporary framework for fiduciary duties. See R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations F-1 (3d ed. 1998) (hereinafter, “Balotti”).
BJR at 3 (citing Kamen v. Kemper Fin. Servs. , Inc. , 908 F. 2d 1338, 1343 (7th Cir. 1990), rev’d on other grounds, 500 U. S. 90 (1991). It should be noted that there have been attempts to “federalize” the law of fiduciary duties, at least to the extent of establishing “minimum standards” of corporate behavior, but such efforts have failed. In the wake of the collapses of Enron, Worldcom and other disasters, however, the U. S. Congress passed and the president signed into law the Sarbanes-Oxley Act of 2002, which has intruded upon the internal affairs of U. S. corporations – areas which traditionally were governed by state law.
The self regulatory organizations (“SROs”), such as the NYSE and the NASDAQ, also have created stricter listing standards which have affected the internal affairs of all listed companies. While these governance reforms do not directly alter the basic fiduciary obligations of directors, they are influencing the judicial climate, and have more “sharply focused” court decisions on the expectations of director processes when measured by the traditional duties of care, good faith and loyalty.