The Diminishing Duty of Loyalty

75 Wash. & Lee L. Rev. 1035 (2018)

Notre Dame Legal Studies Paper No. 1846

62 Pages Posted: 5 Sep 2018

Date Written: August 27, 2018

Abstract

Fiduciary duties comprise an integral part of corporate law. It is generally understood that directors owe the corporation and its shareholders two fiduciary duties: the duty of care and the duty of loyalty. Although both duties are firmly established in corporate law, they are not treated equally. It is generally understood that the duty of loyalty is enforced far more rigorously than the duty of care. The justification for this dichotomy is twofold. First, differential treatment is appropriate because of the relative urgencies of the underlying subject matter: loyalty issues pose greater risks than do care issues. Second, the deference of the business judgment rule is made possible by the rigor of the entire fairness test: directors who are not conflicted can be trusted. In this Article, I demonstrate that the duty of loyalty is not enforced as rigorously as is commonly believed. Over fifty years ago, Professor Harold Marsh argued that the duty of loyalty had been watered down substantially over the preceding century. I argue that the diminishment of the duty of loyalty has continued and increased substantially since the time of his writing. I catalog various legal developments that have had the effect of curtailing the enforcement of the duty of loyalty significantly. As a result of these developments, I maintain that the corporate law reality does not currently match the corporate law theory. I argue that some sort of realignment is necessary: either the law must be amended to correspond to the theory, or the theory must be revised to reflect reality.

Keywords: Corporate law, corporate governance, fiduciary law, duty of loyalty, conflicts of interest, corporate opportunities

JEL Classification: K20, K22

Suggested Citation

Velasco, Julian, The Diminishing Duty of Loyalty (August 27, 2018). 75 Wash. & Lee L. Rev. 1035 (2018); Notre Dame Legal Studies Paper No. 1846. Available at SSRN: https://ssrn.com/abstract=3239605

Julian Velasco (Contact Author)

Notre Dame Law School ( email )

2142 Eck Hall of Law
P.O. Box 780
Notre Dame, IN 46556-0780
United States
574-631-4965 (Phone)

HOME PAGE: http://law.nd.edu/directory/julian-velasco/

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