Abstract

http://ssrn.com/abstract=1017615
 
 

Citations (3)



 
 

Footnotes (127)



 


 



Other People's Money


Douglas G. Baird


University of Chicago Law School

M. Todd Henderson


University of Chicago - Law School


Stanford Law Review, Vol. 60, Symposium issue, 2008
U of Chicago Law & Economics, Olin Working Paper No. 359

Abstract:     
There is no more sacred tenet of corporate law than the one stating that corporate directors owe a fiduciary duty to shareholders. We argue that while this rule has not yet generated seriously wrongheaded outcomes, it is an "almost right" principle that should be abandoned before it does. As a threshold matter, we show the notion of special duties owed to shareholders is plainly inconsistent with everyday business decisions and corporate law. Firms can take and do take actions that are inconsistent with those of a fiduciary and that favor creditors at the expense of shareholders, despite supposedly trumping fiduciary duties owed to the latter. A bankruptcy filing is the most obvious of these.

The recent cases in Delaware over fiduciary duties in the "zone of insolvency" demonstrate how the attempt to delineate clearly what duties are owed to different investors in a firm is doomed to fail. Using Credit Lyonnais and its predecessor Central Ice Cream, we show how courts are attuned to the problem of conflicting interests among different investors, but are not likely to create efficient rules by using labels like "fiduciary duties" and applying them to shareholders sometimes and creditors other times.

We offer two potential replacements for the shareholder fiduciary duty doctrine. The most familiar for corporate scholars and practitioners is the idea of fiduciary duties being owed to the firm as a whole, coupled with a strong business judgment rule. Although we think this is superior to the existing rule, we show how this principle itself may be wanting in some important cases. In venture capital transactions, for one, the ex ante bargain appears to give certain investors the right to take actions in bad states of the world that may destroy firm value in order to create incentives for managers to avoid those bad states. Courts disrupting these deals in the name of fiduciary duties may be upsetting well struck bargains.

We therefore set out an alternative paradigm, one in which no fiduciary duties exist at all, and directors face liability for their decisions (other than for neglect or surreptitious self-dealing) only if they violate a contractual obligation owed a shareholder, creditor, or other investor. We conclude by showing how separating corporate law from conceptions of duty brings needed clarity to the often-litigated issue of disclosure duties. The problem, we suggest, is largely contractual, and in setting the default rules the focus should be on the ability of parties to opt out—or opt in.

Number of Pages in PDF File: 48

Accepted Paper Series





Download This Paper

Date posted: September 27, 2007 ; Last revised: October 13, 2008

Suggested Citation

Baird, Douglas G. and Henderson, M. Todd, Other People's Money. Stanford Law Review, Vol. 60, Symposium issue, 2008; U of Chicago Law & Economics, Olin Working Paper No. 359. Available at SSRN: http://ssrn.com/abstract=1017615

Contact Information

Douglas G. Baird
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9571 (Phone)
773-702-0730 (Fax)
M. Todd Henderson (Contact Author)
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 4,917
Downloads: 1,123
Download Rank: 9,474
Citations:  3
Footnotes:  127

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.328 seconds