The Challenge of Company Stock Transactions for the Directors' Duties of Loyalty

Abstract

This Article explores the intersection of state and federal law in defining corporate directors' duties of loyalty to shareholders and obligations to 401(k) plan beneficiaries. Part I describes the duty of loyalty in trust law, upon which loyalty obligations in state corporate law and federal ERISA law are based. Part II explores the evolving role of the duty of loyalty in Delaware corporate law. Part III analyzes the loyalty obligations that the ERISA law imposes and examines the application of loyalty principles in 401(k) employer stock litigation. Part IV scrutinizes how Delaware jurisprudence and ERISA law diverge and argues that enhanced scrutiny should apply to transactions in which fiduciaries suffer from a "substantial lack of independence." The authors argue that limiting enhanced scrutiny to situations of self-dealing in the transaction itself fails to properly protect shareholders and conclude that their proposal offers increased flexibility and effectiveness in protecting beneficiaries and shareholders from self-interested fiduciaries.

Keywords: fiduciary duties, corporate governance, ERISA, company stock, loyalty, employee benefits

JEL Classification: K22, K31