The Life (and Death?) of Corporate Waste

Abstract

At first glance, corporate waste makes no sense. The very definition of waste — a transaction so one-sided that no reasonable business person would enter into it, an act equivalent to gift or “spoliation” — suggests that it would never occur, for what corporation would ever enter into a transaction so absurd? Yet waste claims are regularly made against corporate managers. Respected judges have called for waste’s abolition, deriding it as a “vestige,” “possibly non-existent,” the Loch Ness monster of corporate law; but waste survives. It is a remnant of ultra vires, a doctrine proclaimed largely dead for the last hundred years — but waste is not dead. It confounds our model of managerial responsibility; after decades in which corporate directors’ and officers’ duties have been focused into the fiduciary duties of care and loyalty, waste sits outside that framework, for historically waste isn’t a fiduciary duty at all. This article, the first modern survey of the corporate waste doctrine, essays waste’s origins, documents and explains its survival, and tentatively foresees its demise.

Keywords: corporations, corporate waste, executive compensation, fiduciary duties, good faith, ultra vires

JEL Classification: K22