Having the fiduciary duty talk: Model advice for corporate officers (and other senior agents)

Business Lawyer

Volumn 63, Issue 1, 2007, Pages 147-161

  Johnson, Lyman ^a  

^a LEE UNIVERSITY   (United States)

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EID: 38849106199     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (101)

1. The Delaware Supreme Court and the Court of Chancery together have, over the years, rendered hundreds of opinions dealing with the duties of corporate directors. See, e.g., Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (holding that the directors duty of good faith is an element of the director's duty of loyalty, not an independent fiduciary duty);
2. ATR-Kim Eng Fin. Corp. v. Araneta, CA. No. 489-N, 2006 WL 3783520, at *15-17 (Del. Ch. Dec. 21, 2006) (finding that director breached his duty of loyalty by stripping corporation of its substantial assets for no consideration),
3. aff'd, No. 60, 2007, 2007 WL 1704647 (Del. June 14, 2007) (unpublished table decision).
4. See, e.g., Corporate Board Member, Conferences, http://www.boardmember.com/conferences/ (last visited Oct. 7, 2007) (listing ten director education programs for the years 2007-2008);
5. Seattle University, School of Law, Center on Corporations, Law Sf Society, The Fifth Annual Directors Training Academy: Adding Value Through Legal, Ethical, and Responsible Corporate Governance, http://www.law.seattleu. edu/ccls/events/directorstraining/2007/brochure.pdf (publicizing conference held on June 15, 2007).
6. All major corporate law casebooks designed for United States law schools and all major corporate law treatises contain materials-to varying extents-on director fiduciary duties. See, e.g., 1 R. FRANKLIN BALOTTI Sr JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS § 4.17 (3d ed. 2007).
7. COMM. ON CORP. LAWS, SECTION OF BUS. LAW, AM. BAR ASS'N, CORPORATE DIRECTORS GUIDEBOOK (5th ed. 2007).
8. See Lyman P.Q. Johnson St David Milion, Recalling Why Corporate Officers Are Fiduciaries, 46 WM. Sr MARY L. REV. 1597, 1600-01, 1609-10 (2005).
9. Lyman PQ. Johnson, Corporate Officers and the Business Judgment Rule, 60 BUS. LAW. 439 (2005);
10. Lawrence A. Hamermesh St A. Gilchrist Sparks, III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson, 60 BUS. LAW. 865 (2005).
11. Casebooks and treatises pay little, if any, separate attention to the fiduciary duties of corporate officers. See Johnson St Millon, supra note 5, at 1600 St n.10, 1609-10 (noting how legal materials generally lump officers and directors together, making no distinctions between them).
12. Lyman P.Q. Johnson Sr Robert V Ricca, (Not) Advising Corporate Officers About Fiduciary Duties, 42 WAKE FOREST L. REV. 663, 669-78 (2007).
13. MODEL BUS. CORP. ACT ANN. § 8.42 (2005) (listing thirty states with statutes based on the Model Act).
14. See infra note 16 for a citation to all thirty-four statutes. As noted in footnote 16, two states-Nevada and New York-have statutory standards of conduct for officers but those statutes are not based on the Model Act. Moreover, the statutes of South Dakota and West Virginia appear to be based on the Model Act but for some reason (perhaps oversight) the Annotated Model Act does not list the statutes of those two states.
15. See Johnson St Millon, supra note 5;
16. Jill Barclift, Senior Corporate Officers and the Duty of Candor: Do the CEO and CFO Have a Duty To Inform?, 41 VAL. U. L. REV. 269 (2006).
17. Although this Article specifically addresses corporate officers, the agency principles drawn on in fashioning advice for officers about their fiduciary duties can apply more broadly in the business organization area. They are pertinent to unincorporated associations, such as in advising managers of limited liability companies and partners of partnerships, inasmuch as those persons are agents, subject, of course, to what the applicable business entity statute and operating agreement or partnership agreement specify on the subject of fiduciary duties. Unless no fiduciary duties whatsoever are owed-
18. see infra note 3 3 for recent scholarship exploring policy concerns about such an extreme arrangement-managers and partners also should be advised of their duties by the businesss lawyer, in the same essential manner (if not with the same substantive content) as this Article advocates for corporate officers.
19. RESTATEMENT (THIRD) OF AGENCY (2006). Those sections of the Restatement most relevant to agent duties are reproduced in Appendix 1. The Reporter for the Restatement, Professor Deborah DeMott, has written articles on agency principles subsequent to her drafting of the Restatement.
20. See Deborah A. DeMott, The Discrete Roles of General Counsel, 74 FORDHAM L. REV. 955 (2005);
21. Deborah A. DeMott, Inside the Corporate Veil: The Character and Consequences of Executives' Duties, 19 AUSTL. J. CORP. L. 251 (2006);
22. Deborah A. DeMott, Disloyal Agents, 58 ALA. L. REV. 1049 (2007).
23. See Appendix 2 Sr supra note 16. Delaware, the leading corporate law state, has no general statutory standards of conduct for officers or directors. However, Delaware does have a statute dealing with conflict of interest transactions between a corporation and any of its officers or directors.
24. DEL. CODE tit. 8, § 144 (2007) (citations to the Delaware Code are to the official online version at http://www.delcode.delaware. gov/ (last accessed Sept. 27, 2007)).
25. Also, to be eligible for indemnification by the corporation, an officer must have acted "in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation." DEL CODE tit. 8, § 145(a), (b) (2007). This Article does not specifically address corporate statutes dealing with conflict of interest transactions involving, or indemnification statutes covering, corporate officers. Such statutes do require certain specified conduct of officers. Adherence to the model advice set forth in Part 111 substantially enhances the likelihood that officers will meet the required standard of conduct prescribed in those sorts of statutes.
26. See MODEL BUS. CORP. ACT § 8.42 (2005).
27. Comm. on Corp. Laws, Section of Bus. Law, Am. Bar Ass'n, Changes in the Model Business Corporation Act-Amendments Relating to Chapters 1,7,8 and 14, 60 BUS. LAW. 943, 951 (2005).
28. The statement in the text is based on a survey of statutes which were in effect as of August 1, 2007.
29. ALA. CODE § 10-2B-8.42 (1999);
30. ALASKA STAT. §§ 10.06.483(e), (f) (2004);
31. ARIZ. REV. STAT. ANN. § 10-842 (2004);
32. ARK. CODE ANN. § 4-27-842 (2001);
33. COLO. REV. STAT. §§ 7-108-401, 402 (2007);
34. CONN. GEN. STAT. ANN. § 33-765 (West 2005);
35. GA. CODE ANN. § 14-2-842 (2003);
36. HAW. REV. STAT. ANN. § 414-233 (LexisNexis 2004);
37. IDAHO CODE ANN. § 30-1-842 (2005);
38. IOWA CODE ANN. § 490.842 (West 1999 Sr Supp. 2007);
39. KY. REV. STAT. ANN. § 271B.8-420 (West 2006);
40. LA. REV. STAT. ANN. § 12:91 (1994 & Supp. 2007);
41. ME. REV. STAT. ANN. tit. 13-C, § 843 (2005);
42. MASS. GEN. LAWS ch. 156B, § 65 (2004);
43. MICH. COMP. LAWS ANN. § 450.1541(a) (West 2002);
44. MINN. STAT. § 302A.361 (2006);
45. MISS. CODE ANN. § 79-4-8.42 (2001);
46. MONT. CODE ANN. § 35-1-443 (2005);
47. NEB. REV. STAT. § 21-2099 (1997);
48. N.H. REV. STAT. ANN. § 293-A:8.42 (1999);
49. N.C. GEN. STAT. ANN. § 55-8-42 (West 2005);
50. N.D. CENT. CODE § 10-19.1-60 (2005);
51. OR. REV. STAT. § 60.377 (2005);
52. PA. CONS. STAT. ANN. §§ 1712(c), 1732(c) (West 1995);
53. S.C. CODE ANN. § 33-8-420 (2006);
54. S.D. CODIFIED LAWS § 47-1A-842 (2007) (citation to the South Dakota Code is to the official online version at http://legis.state. sd.us/statutes/ StatutesQuickFind.aspx (last accessed Sept. 27, 2007));
55. TENN. CODE ANN. §§ 48-18-403, 48-18-601 (2002);
56. TEX. BUS. CORP. ACT art. 2.42 (2007) (citation to the Texas Business Corporation Act is to the official online version at http://tlo2.tlc.state.tx.us/statutes/ba.toc.htm (last accessed Sept. 27, 2007));
57. UTAH CODE ANN. § 16-10a-840 (2005);
58. WASH. REV. CODE ANN. § 23B.08.420 (West 1994);
59. W VA. CODE ANN. § 31D-8-842 (LexisNexis 2003);
60. WYO. STAT. ANN. § 17-16-842 (2007).
61. Nevada and New York also have statutory standards of conduct for officers that differ from the Model Act. The Nevada statute essentially requires only that the officer act in good faith and "with a view to the interests of the corporation." NEV. REV. STAT. ANN. § 78.138 (LexisNexis 1994 St Supp. 2005).
62. The New York statute requires good faith and the care that an ordinarily prudent person would use. N.Y. BUS. CORP. LAW § 715(h) (Consol. 2003).
63. MINN. STAT. ANN. § 302A.361 (2006);
64. N.D. CENT. CODE § 10-19.1-60 (2005).
65. New York, although not a Model Act state, also imposes this requirement. N.Y. BUS. CORP. LAW § 715(h) (Consol. 2003).
66. See MODEL BUS. CORP. ACT § 8.42 (1984).
67. Compare GA. CODE ANN. § 14-2-842 (2003),
68. with MODEL BUS. CORP. ACT § 8.42 (2005).
69. See MODEL BUS. CORP. ACT ANN. § 8.42 (2005).
70. See Appendix 2, MODEL BUS. CORP. ACT § 8.42 (2005).
71. See id.
72. See Appendix 1, RESTATEMENT (THIRD) OF AGENCY § 8.08 (2006).
73. See id. § 8.01. Model Business Corporation Act § 8.42, modeled on the director standard of conduct found in Model Act § 8.30, is probably essentially a duty of care provision.
74. See MODEL BUS. CORP. ACT ANN, § 8.30 cmt. (2005) ("This standard of conduct is often characterized as a duty of care.").
75. See RESTATEMENT (THIRD) OF AGENCY § 8.01 cmt. b (2006);
76. id. § 8.08(b) reporters note b.
77. See id. § 8.08(b) reporteras note b. Although the term "prudence" is less widely used today than in years past, the duty of care included, historically, the obligation of "prudence."
78. See supra notes 17-18 and accompanying text. Prudence is an ancient moral virtue involving deliberation and judgment that, when exercised on behalf of another, would seem to be "fiduciary" in character.
79. See Joseph F. Johnston, Jr., Natural Law and the Fiduciary Duties of Business Managers, in BUSINESS AND RELIGION: A CLASH OF CIVILIZATIONS? 279, 289-90 (Nicholas Capaldi ed., 2005).
80. See Appendix 1, RESTATEMENT (THIRD) OF AGENCY § 8.08 (2006).
81. See Appendix 2, MODEL BUS. CORP. ACT § 8.42 (2005).
82. See RESTATEMENT (THIRD) OF AGENCY § 8.06 cmt. b (2006).
83. See RESTATEMENT (THIRD) OF AGENCY § 8.08 cmt. b (2006).
84. See MODEL BUS. CORP. ACT ANN. § 8.42 cmt. (2005).
85. Aaron D. Jones, Corporate Officer Wrongdoing and the Fiduciary Duties of Corporate Officers Under Delaware Law, 44 AM. BUS. LJ. 475 (2007) (arguing for limits on the ability of officers to alter their fiduciary duties contractually).
86. Several recent articles thoroughly describe and analyze the policy concerns of broadly permitting a contractual "opt-out" of fiduciary duties in the unincorporated business association context. Carter G. Bishop, A Good Faith Revival of Duty of Care Liability in Business Organization Law, 41 TULSA L. REV. 477 (2006);
87. Reza Dibadj, The Misguided Transformation of Loyalty Into Contract, 41 TULSA L. REV. 451 (2006);
88. Robert W Hillman, Closely-Held Firms and the Common Law of Fiduciary Duty: What Explains the Enduring Qualities of a Punctilio, 41 TULSA L. REV. 441 (2006);
89. Mark J. Loewenstein, Fiduciary Duties and Unincorporated Business Entities: In Defense of the "Manifestly Unreasonable" Standard, 41 TULSA L. REV. 411 (2006).
90. Contractual opt-outs of fiduciary duties are problematic enough when a person (such as a stockholder) acts in his or her own behalf to permit a fiduciary (such as a director) to be (somewhat) free of fiduciary constraints. It is more problematic yet when a person who is a fiduciary (e.g., a corporate director) acts on behalf of a party to whom he or she owes fiduciary duties, to permit yet another fiduciary (e.g., a corporate officer) to be (somewhat) free of fiduciary duties. See Johnson St Millon, supra note 5, at 1641. Thus, it may be more problematic to carve back an agents duties in the latter setting than in the former.
91. Johnson St Millon, supra note 5, at 1631-34.
92. See RESTATEMENT (THIRD) OF AGENCY § 8.08 cmt. b (2006).
93. See MODEL BUS. CORP. ACT ANN. § 8.42 cmt. (2005).
94. The proposed advice is based on the latest (2005) version of section 8.42. Although that version has yet to be adopted by any state, the disclosure obligations it imposes on a Company's officers are sound and serve the company's interests. Moreover, section 8.11 of the Restatement mandates disclosure in certain instances as well, although it is probably narrower in scope than the latest version of section 8.42. See Appendix 1, RESTATEMENT (THIRD) OF AGENCY § 8.11 (2006). The duty of a trustee to provide information also is an important related subject today.
95. See Thomas P Gallanis, The Trustees Duty to Inform, 85 N.C. L. REV. 1595 (2007).
96. Section 406 of the Sarbanes-Oxley Act requires a public company to disclose whether it has adopted a code of ethics for senior financial officers and to disclose in public filings if its code of ethics changes or if any waivers from the code are granted by the company. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, § 406, 116 Stat. 745, 789-90 (codified at 15 U.S.C. § 7264 (Supp. V 2005)). It is now customary for public companies to include a wide range of matters in their codes of ethics and to make them applicable to a significant number, if not all, of their employees.
97. Cf. Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (describing director duties as "unremitting").
98. Johnson St Ricca, supra note 8, at 681-84 St nn. 87-105 (describing professional responsibility of lawyers to advise officers).
99. Note that the reporting obligation under section 8.11 of the Restatement is formulated somewhat differently than the obligation under section 8.42 of the Model Act. The proposed advice combines the two formulations.
100. For a discussion of these reasons, see Johnson St Ricca, supra note 8, at 681-91.
101. In 2004, Delaware amended its jurisdictional statute to assert jurisdiction over officers who are not also directors. See DEL. CODE tit. 10, § 3114(b) (2007).