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Abstract:
An important development in corporate law is the recent explicit recognition, in a series of Delaware cases, that corporate managers owe a fiduciary duty of good faith in addition to their traditional duties of care and loyalty. The duty of good faith was not created by those cases. On the contrary, the duty has long been explicit under the statutes - for example, in statutory provisions that require directors to act in good faith, and in provisions concerning indemnification. The duty of good faith has also long existed implicitly in the case law - for example, in the formulation of the business judgment rule and in fiduciary obligations that can only be explained by that duty, such as the duty not to knowingly cause the corporation to violate the law. Nevertheless, the explicit recognition of the duty of good faith in recent Delaware cases shines a spotlight on that duty and therefore makes it especially important to develop the contours of the duty and to examine the duty from a normative perspective.

Briefly, the duty of good faith in corporate law is comprised of a general baseline conception and specific obligations that instantiate that conception. The baseline conception consists of four elements: subjective honesty, or sincerity; nonviolation of generally accepted standards of decency applicable to the conduct of business; nonviolation of generally accepted basic corporate norms; and fidelity to office. Among the specific obligations that instantiate the baseline conception are the obligation not to knowingly cause the corporation to disobey the law and the obligation of candor even in non-self-interested contexts.

Turning to the normative issue, there are several basic reasons why the duty of good faith is desirable. To begin with, the duties of care and loyalty do not cover all types of improper conduct by managers, because certain kinds of managerial misconduct fall outside the spheres of those duties, and most of these types of misconduct fall within the duty of good faith. Furthermore, various rules limit a manager's accountability under the duties of care and loyalty, and these limiting rules should be and are inapplicable to conduct that violates the duty of good faith. Moreover, the duties of care and loyalty characteristically (although not invariably) function as platforms for liability rules, while the duty of good faith characteristically (although not invariably) functions as a condition to the application of rules that do not in themselves impose liability. This difference in characteristic function makes it desirable to treat good faith separately from care and loyalty. Finally, the duty of good faith provides a principled basis for the courts to articulate new specific fiduciary obligations that come to be seen as appropriate in response to changes in social and business norms, and in the general understanding of efficiency and other policy considerations, but that cannot be easily accommodated within the duties of care or loyalty.

Delaware, Journal, Corporate, Law, duty, good faith, manager, accountability

Abstract:
Agency problems beset firms and prompt opportunistic behavior by employees. Opportunistic behavior redistributes value, whereas cooperative behavior creates value. Firm-specific fairness norms typically promote the firm's efficiency by increasing cooperation and decreasing opportunism. Firm-specific fairness norms best promote efficiency when supported by reputation effects and when the firm's agents internalize the norms. People who internalize norms acquire good character. We will develop the concept of "good agent character", by which we mean agent character that serves the firm's profitability by embodying the firm's fairness norms. Good agent character conveys an advantage to superiors and subordinates in forming cooperative relations with other people who can read character.

Abstract:
The basic remedy for breach of a bargain contract is expectation damages, which puts the injured party where she would have been had the contract been performed. It is generally accepted that the expectation measure provides efficient incentives to a bargain-promisor. Beginning about twenty years ago, however, law-and-economics scholars developed a model of damages which showed that the expectation measure can provide inefficient incentives to a bargain-promisee. The theory is that the expectation measure insures the promisee's reliance, and may thereby cause the promisee to overrely - that is, to invest more heavily in reliance than efficiency requires. The theory of overreliance is not limited in its application to the expectation measure, but it is most salient to that measure, just because the expectation measure is the gold standard in a bargain context.

The model upon which the theory of overreliance is based provides an extremely important insight into damages. As time went on, however, law-and-economics scholars started to lose sight of the fact that the model was just that, a model, and began to widely assume, explicitly or implicitly, that the expectation measure not only can but does provide inefficient incentives to promisees. The objective of this Article is to rehabilitate the expectation measure of damages, by showing that when institutional considerations are taken into account the theory of overreliance has virtually no real-world application. In the great majority of cases, overreliance normally cannot occur, because of the way in which the expectation measure is applied in specific contexts, because of the economics of transactions, or both. Overreliance is also unlikely to occur even in most of the residual cases, because as a result of litigation risks and litigation costs the standard expectation measure does not insure the promisee's reliance. There are a few remaining real-world cases in which overreliance might occur. In principle, the standard expectation measure could be modified to prevent overreliance in those few cases. However, the benefits of such a modification would be very low, partly because overreliance is so unlikely occur, and partly because where overreliance does occur it is likely to involve only small, marginal increments. In contrast, the costs of a modified expectation measure would be very high, because of the direct costs that would be entailed in applying the theory of overreliance to actual cases, and the indirect effect of those costs on the behavior of contracting parties.

Abstract:
It is a commonly held position that a rule cannot be a legal rule unless it is binding; or to put it differently, that one element that distinguishes legal rules from other kinds of rules is that legal rules are regarded as binding by duly constituted officials - typically, courts - who are called upon to apply them. Similarly, it is an often-held position that the law consists of the rules of a jurisdiction that are duly enacted or adopted by officials who have the power to make rules that are binding in the jurisdiction. The thesis of this article is that both positions are incorrect.

I begin by developing a concept that I call national law. The concept of national law is that there is a body of law in the United States that is made by officials across jurisdictions, legal scholars, and scholarly institutions, which constitutes law despite the fact that it is not binding in, and is not necessarily made by, officials of a deciding jurisdiction. Examples of national law are the rules that a donative promise is enforceable if relied upon, that an acceptance is effective on dispatch, and that the remedy for breach of a bargain contract is expectation damages. National law is law because, as I show, under the practice of the legal profession, particularly the courts, the rules of national law (and not simply the reasons for those rules) are invoked as legal rules of decision.

Next, I take the concept of a rule of recognition as a postulate, and develop the following four principles concerning the meaning, application, and scope of that concept, which are independent of, but exemplified by, the concept of national law: (1) The social group that must accept a secondary rule for the rule to constitute a rule of recognition is the legal profession, rather than simply judges and other officials. (2) Whether the legal profession accepts a secondary rule as a rule of recognition can be determined by examining the kinds of primary rules that are invoked by the profession as legal rules in resolving legal issues in general, and deciding cases in particular. (3) A rule can be a legal rule even though it is not binding. (4) In the United States, law is made not only by judges and other officials of the deciding jurisdiction, but also by the national judiciary, legal scholars, and professional institutions (in particular, the American Law Institute).

Abstract:
Three fundamental concepts underlie the principles that should govern unexpected-circumstances cases. (1) A contract consists not only of the writing in which it is partly embodied, but also includes, among other things, certain kinds of tacit assumptions. (2) These assumptions may be either event-centered or magnitude-centered. (3) The problems presented by unexpected-circumstances cases should be viewed in significant part through a remedial lens. The principles that rest on these concepts can be broadly summarized as follows. A shared nonevaluative tacit assumption that a given circumstance will persist, occur, or not occur during the contract time should provide a basis for judicial relief where the assumption would have affected the promisor's obligations had it been made explicit. If the promisor was neither at fault for the occurrence of the unexpected circumstance, nor in control of the conditions that led to the occurrence, she should not be liable for expectation damages. The promisor should, however, be liable for restitutionary damages, because it would be unjust to allow the promisor to both be excused from performance and retain any benefits that she received under the contract. Alternatively, the promisor should be liable for reliance damages where she is at fault for the creation of the unexpected circumstance, but the fault is minor; where the promisor is in control of the conditions that led to the occurrence of the unexpected circumstances; or where an objective of the contract was to reserve for the promisor the promisee's time, labor, or productive capacity. A seller should also be entitled to judicial relief if as a result of a dramatic and unexpected rise in her costs, performance would result in a financial loss that is significantly greater than the risk of loss that the parties would reasonably have expected that the seller had undertaken. If, under such circumstances, the market value of the contracted-for commodity has risen in tandem with the seller's costs, the buyer should be entitled to the profit he would have made if a reasonably foreseeable increase in the seller's cost of performance, and a corresponding increase in the market value of the commodity, had occurred. In appropriate cases, courts should take into account gains and losses to both parties that proximately resulted from, or were made possible by, the occurrence of the unexpected circumstance.

unexpected-circumstances cases, contracts

Abstract:
An important development in American corporate law is the recent explicit recognition, in a series of Delaware cases, that corporate managers owe a fiduciary duty of good faith in addition to their traditional duties of care and loyality. The duty of good faith was not created by those cases. On the contrary, the duty has long been explicit under the statutes and has also long existed implicitly in the case law. Nevertheless, the explicit recognition of the duty of good faith in recent Delaware cases shines a spotlight on that duty, and therefore makes it especially important to develop the contours of the duty and to examine the duty from a normative perspective.

Briefly, the duty of good faith in American corporate law is comprised of a general baseline conception and specific obligations that instantiate that conception. The baseline conception consists of four elements: subjective honesty, or sincerity; nonviolation of generally accepted standards of decency applicable to the conduct of business; nonviolation of generally accepted basic corporate norms; and fidelity to office. Among the specific obligations that instantiate the baseline conception are the obligation not to knowingly cause the corporation to disobey the law and the obligation of candor even in non-self-interested contexts.

Turning to the normative issue, there are several basic reasons why the duty of good faith is desirable. To begin with, the duties of care and loyalty do not cover all types of improper conduct by managers, because certain kinds of improper managerial conduct fall outside the spheres of those duties. Most of these types of conduct fall within the duty of good faith. Furthermore, various rules limit a manager's accountability under the duties of care and loyalty, and these limiting rules should be and are inapplicable to conduct that violates the duty of good faith.

Moreover, the duties of care and loyalty characteristically (although not invariably) function as platforms for liability rules, while the duty of good faith characteristically (although not invariably) functions as a condition to the application of rules that do not in themselves impose liability. This difference in characteristic function makes it desirable to treat good faith separately from care and loyalty. Finally, the duty of good faith provides a principled basis for the courts to develop new specific fiduciary obligations that come to be seen as appropriate in response to changes in social and business norms, and in the general understanding of efficiency and other policy considerations that are applicable to corporate law, but cannot be easily accommodated within the duties of care or loyalty.

Abstract:
Corporate law serves both to facilitate and to regulate the conduct of the corporate enterprise. Insofar as corporate law is regulatory, it provides incentives and disincentives to the major actors in the corporate enterprise -- directors, officers, and significant shareholders -- through the threat of liability. In significant part, however, these actors are motivated not by the desire to avoid liability, but by the prospect of financial gain, on the one hand, and by social norms, on the other. Much work has been done on the way in which these actors are motivated on the threat of liability and the prospect of financial gain, but relatively little work has been done on the operation of social norms.

In this Article, I examine the interrelation of social norms and law in corporate law. The purpose of this examination is to illuminate both corporate law specifically, and the interrelation of social norms and law generally, by studying ways in which that interrelation operates in a specific field. I focus on three kinds of social norms, which I call descriptive norms, conventions, and obligational norms.

The organization of the Article is as follows: I begin by describing and defining the kinds of social norms that are relevant to law. I then consider, in a preliminary way, the effects and origins of social norms. Finally, I examine the critical role of social norms in three central areas of corporate law: fiduciary duties (care and loyalty), corporate governance (board composition and the role of institutional investors), and takeovers. In the course of that examination, I apply and elaborate the introductory analysis concerning the kinds, origins, and effects of social norms, and consider some of the kinds of interrelations between social norms and law.

Abstract:
A long-standing issue in corporate law is the extent to which corporations can properly engage in nonmaximizing conduct. The analysis of this issue has often been obscured by a tendency to treat nonmaximizing conduct as a single category. In fact, however, such conduct falls into a number of different categories, many of which are consistent with maximization. For example, obedience to legal and ethical principles is consistent with maximization, even if greater gains could have been achieved by acting unlawfully or unethically, because law and ethics are channels through which maximization must flow. Certain other kinds of nonmaximizing conduct may be justified either because the conduct falls within the penumbra of legal or ethical principles, reciprocates for benefits that the corporation has received, or is equivalent to ordinary business activity; or because the conduct, if engaged in by a sufficient number of corporations, is value-maximizing. Nonmaximizing conduct that does not fall within these categories may still be justified if it is reasonable, in terms of the nexus between the conduct and the corporation's business and the amount involved in light of customary practices. However, such conduct should be subject to the check of disclosure, especially in the case of contributions to a nonprofit entity that involve conflicts of interest.

Abstract:
The monitoring model of the board has been widely accepted in both theory and practice. Until now, however, the focus of that model has been on board process and board structure, rather than on the board's substantive responsibilities. This article develops a substantive responsibility of the board of a publicly held corporation that is critical to implementation of the monitoring model: the responsibility for internal control. Under a widely accepted definition, internal control is a process involving a control environment, risk assessment, control activities, information and communication, and monitoring, designed to provide reasonable assurance regarding the achievement of corporate objectives in (i) the effectiveness and efficiency of operations, (ii) the reliability of financial reporting, and (iii) compliance with applicable laws and regulations. The thesis of this article is that in publicly held corporations the board should be responsible for the existence, integrity, and efficacy of the corporation's internal control. One reason why the board should be responsible for internal control is that internal control is an instrument to constrain managerial opportunism in seizing short-term profit opportunities that involve violations of corporate policies or legal rules. A second reason is that internal control, and the information flows associated with such control, comprise an important method for dealing with the problem of asymmetric information in publicly held corporations. Since the monitoring model assumes both some degree of oversight of the managers and an adequately informed board, the board's responsibility for internal control flows naturally from that model.