Fiduciary Duties and Fiduciary Outs

Abstract

Fiduciary outs are virtually ubiquitous in acquisition agreements, but almost unheard of in other contexts. This is because the fiduciary out is an inherently problematic device. Although it is not intended to do so, it almost necessarily transforms an agreement into an option in the hands of one party. Nevertheless, fiduciary outs make sense in the context of acquisition agreements. This is because fiduciary outs are essentially contractual proxies for fiduciary duties. As such, they have the same purpose: to protect shareholders from abuse at the hands of directors. Fiduciary outs do this in the context of acquisition agreements by protecting the right of the shareholders to vote against the transaction in question against interference by the directors. However, this rationale does not extend beyond the context of acquisition agreements. Thus, although fiduciary outs should remain permissible in that context, they should not be extended to any other context.

Keywords: corporate law, fiduciary law, fiduciary duties, fiduciary outs, corporate governance

JEL Classification: k20, k22