Dangerous Liaisons: Corporate Law, Trust Law, and Inter-Doctrinal Legal Transplants

Abstract:     
In this diagnosis of the difficulties of Corporate Law's "duty of care" illustrated by Smith v. Van Gorkom, we argue that the problem is an example of the potential for mischief inherent in legal transplants. Historically, the "duty of care" was transplanted into Corporate Law from the law of Trusts and Agency. The key issue that has bedeviled the Delaware courts and the drafters of the Model Business Corporation Act has been the question whether directors - like trustees and agents - should bear legal liability for negligence. We argue that the difficulties that this issue has presented for corporate law arise because the concept was transplanted across the market/firm boundary, without recognition that that boundary represents a choice between third party judicial enforcement of market transactions and non-legal self-governance within firms. While a negligence based duty of care may be sustainable (with difficulty) for market actors like trustees, it becomes impossible once a relationship is brought within the firm.

Number of Pages in PDF File: 23

Keywords: Duty of Care, Directors' Liability, Negligence, Governance, Van Gorkom

JEL Classification: G3

Accepted Paper Series