In Search of a Higher Standard: Rethinking Fiduciary Duties of Directors of Wholly-Owned Subsidiaries
Stefan J. Padfield
University of Akron School of Law
Fordham Journal of Corporate and Financial Law, Vol. 10, p. 79, 2004
U of Akron Legal Studies Research Paper No. 06-16
An important, yet undeveloped, area of corporate law concerns the fiduciary duties of wholly-owned subsidiary directors. The district court in First American Corp. v. Al-Nahyan, 17 F. Supp. 2d 10 (D.D.C. 1998), expressed the hope that this "perplexing issue" would become the subject of "a more robust discourse." Id. at 26, n.17. The Delaware Supreme Court has said that "in a parent and wholly owned subsidiary context, the directors of the subsidiary are obligated only to manage the affairs of the subsidiary in the best interests of the parent and its shareholders." Anadarko Petroleum Corp. v. Panhandle Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988). Meanwhile, the district court in Al-Nahyan concluded that "the directors of a wholly-owned subsidiary owe the corporation fiduciary duties, just as they would any other corporation." 17 F. Supp. 2d at 26. As for legal commentators, one has argued that a fundamental rights analysis should be applied to differentiate legitimate from illegitimate shareholder demands in the wholly-owned subsidiary context. Another has suggested that due to the uniquely insulated nature of the relationship between a parent company and its wholly-owned subsidiary, directors of wholly-owned subsidiaries should be held to a lesser standard than other directors - perhaps all we should expect of them is to act as mere agents of the parent. In this article, I argue that precisely because the relationship between a parent company and its wholly-owned subsidiary is so insulated, directors of wholly-owned subsidiaries should be held to higher fiduciary standards than other directors. In the alternative, I argue that a derivative right to enforce the wholly-owned subsidiary director's duty to the corporation should be granted to certain stakeholders.
Number of Pages in PDF File: 51
Keywords: fiduciary, corporate, director, subsidiary
JEL Classification: K10, K22Accepted Paper Series
Date posted: May 18, 2006
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