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

23 Pages Posted: 22 May 2002 Last revised: 28 Jan 2012

See all articles by Edward B. Rock

Edward B. Rock

New York University School of Law; European Corporate Governance Institute

Michael L. Wachter

University of Pennsylvania Law School - Institute for Law and Economics

Date Written: January 27, 2012

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.

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

JEL Classification: G3

Suggested Citation

Rock, Edward B. and Wachter, Michael L., Dangerous Liaisons: Corporate Law, Trust Law, and Inter-Doctrinal Legal Transplants (January 27, 2012). Northwestern University Law Review, Vol. 96, p. 651, 2002, U of Penn, Inst for Law & Econ Research Paper No. 02-03, Available at SSRN: https://ssrn.com/abstract=310104

Edward B. Rock (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Michael L. Wachter

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-7852 (Phone)
215-573-2025 (Fax)

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