Dynamic Fiduciary Duties

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 clearly 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.

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 Article will then explore whether the uncertainty of fiduciary beneficiaries could be a desirable legal feature. Two hypotheses will be considered. First, it may be that dynamic fiduciary duties follow predictable patterns, reflecting changes in the allocations of bargaining power among corporate constituencies. This would suggest that dynamic fiduciary duties provide, at least in part, 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.”

Number of Pages in PDF File: 39

Keywords: fiduciary duties, corporate law, bargain-mimicking defaults, evolutionary approaches

Accepted Paper Series