Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty

64 Pages Posted: 28 Feb 2019 Last revised: 4 Mar 2019

Date Written: February 11, 2019

Abstract

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.

Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.

This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.

Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

Keywords: Fiduciary Duties, Corporations, Corporate Law, Business Ethics, Corporate Governance, Liberalism, Populism

JEL Classification: K22

Suggested Citation

Pace, H. Justin, Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty (February 11, 2019). Available at SSRN: https://ssrn.com/abstract=3332667 or http://dx.doi.org/10.2139/ssrn.3332667

H. Justin Pace (Contact Author)

Western Michigan University - Finance & Commercial Law ( email )

Kalamazoo, MI 49008
United States

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

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