No Power to Be Disloyal (or, How Not to Write a Loyalty Opinion)

6 Journal of Business, Entrepreneurship & the Law 247 (2013)

34 Pages Posted: 11 Oct 2014

See all articles by Val Ricks

Val Ricks

South Texas College of Law Houston

Date Written: April 26, 2013

Abstract

Sometimes, courts find that a manager or director of a business entity was disloyal. The fiduciary duty of loyalty is a lofty standard. Under such a standard, exonerating a defendant may be difficult, even when it is the right thing to do. But a defendant who is not pure as the driven snow may sometimes not deserve liability. A judge with high standards may decline to approve of the defendant’s conduct but still want to reach the right result. When courts decline to find disloyalty, they give various reasons: the disloyalty was waived, the conduct was ratified by an appropriate constituency, or the conduct was fair.

But sometimes courts talk as if certain conduct is privileged, as if some right owned by the defendant trumped the duty of loyalty. Generally, it is a right given in the applicable code without a hint that it relates in any way to the duty of loyalty. I find this talk troubling. The duty of loyalty is the bedrock of investor expectations. The duty requires that defendants act in good faith, i.e., that their actions serve a purpose of the entity and are not intentionally or in conscious disregard of the rights of investors. Methods of unfair opportunism available to insiders are endless. Only an open-ended duty could catch them all.

So talk of privilege or right to act notwithstanding loyalty is a concern. Nearly any absolute privilege to act, given the right circumstances, can be used disloyally. Courts’ stating that a business entity actor has a privilege to do any act notwithstanding the interests of investors is an invitation to those actors to use that privilege to cheat.

It is the thesis of this paper that no privilege to act disloyally exists: that a power to act never trumps the duty of loyalty. My method is to discuss three cases in which the privilege or power to act appears to receive judicial support: Covalt v. High (N.M. App. 1983); North-West Transportation Co., Ltd. v. Beatty (UK Privy Council 1887); and Thorpe v. CERBCO, Inc. (Del. 1996). The paper shows why this strategy does not work. Such assertions have no support in logic (and usually not in law), provide a slippery slope at the bottom of which the duty of loyalty ceases to exist, often result in a decision being internally inconsistent, and fail to stand the test of time. I will do my best to unwind the harm these cases might cause. My hope is that those reading this paper will take its criticism to future cases so that this kind of argument can be defeated elsewhere in the law, and so that courts will not assert such things in the future. There is always a better, wiser course.

Suggested Citation

Ricks, Val D, No Power to Be Disloyal (or, How Not to Write a Loyalty Opinion) (April 26, 2013). 6 Journal of Business, Entrepreneurship & the Law 247 (2013). Available at SSRN: https://ssrn.com/abstract=2508064

Val D Ricks (Contact Author)

South Texas College of Law Houston ( email )

1303 San Jacinto Street
Houston, TX 77002
United States
7136462944 (Phone)

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