Upstream Liability, Entities as Boards, and the Theory of the Firm
74 The Business Lawyer 313 (2019)
16 Pages Posted: 23 May 2019
Date Written: April 23, 2019
Directors have fiduciary duties, and the most litigated and most demanding of those duties is the duty of loyalty. The key questions for duty of loyalty litigation are director- by-director questions: Did this particular director have a conflict? Is it futile to make a demand on that particular director? What does it mean to ask director-by-director questions if corporations have just one director, which is itself an entity? Shall we inquire about particular humans in the managing entity or limit our analysis to the entity itself? The question becomes richer and more important if the board-entities opt to bundle services: We know how to evaluate a conflict when a director urges the company to patronize her own accounting or banking firm. How should we evaluate the conflict if a managing entity opts to use its own accounting or banking department? Our conflict analysis is usually of contractual transactions but the essence of the Coasian firm is the absence of a contract to analyze. I explore how the duty of loyalty might work when entities manage entities and uncover important lessons about how loyalty works.
Keywords: board, directors, outsourcing, conflicts, loyalty, fiduciary, corporation, entity, theory of the firm, veil piercing, corporate law, company law, limited partnership
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