Corporate law is characterized by a pervasive divergence between standards of conduct and standards of review. Courts often opine on the relatively demanding standard of conduct, but their judgments must be based on the more forgiving standard of review. Commentators defend this state of affairs by insisting that it provides guidance to directors without imposing ruinous liability. However, the dichotomy can lead many, especially those who focus on the bottom line, to call into question the meaningfulness of standards of conduct. Of particular concern is the increasing popularity, in legal and scholarly circles, of the notion that fiduciary duty standards of conduct are aspirational and unenforceable. This theory, which I will call the "aspirational view," is misguided. The use of the term "aspirational" is especially problematic. Whatever else "aspirational" may mean, it does not mean obligatory or mandatory. Whether by design or only by effect, the aspirational view has the potential to undermine fiduciary duties significantly. In this Article, I will argue that fiduciary duty standards of conduct are in fact duties--fully binding on actors even when they are not enforced. I will also argue that the unenforced duty is a meaningful concept because people obey the law for many different reasons, and not simply out of fear of punishment.
TABLE OF CONTENTS
I. THE ASPIRATIONAL VIEW
A. Legal Scholarship
B. The Disney Case
C. Judges Writing Extrajudicially
II. WHY THE DIVERGENCE?
A. Acoustic Separation
B. Room for Error
III. BIFURCATION OR TRIPARTITION?
IV. STANDARDS OF CONDUCT ARE NOT MERELY
A. Are Standards of Conduct Aspirational?
B. The Viability of the Unenforced Requirement
C. Is There Enforcement After All?
A peculiar characteristic of corporate law is the divergence of standards of conduct and standards of review. (1) Standards of conduct are rules of behavior that tell actors what is expected of them. Standards of review, on the other hand, are rules of decision that tell judges how to adjudicate cases. In many areas of law, the two types of standards coincide. For example, in tort law, the standard of conduct is ordinary care, and the standard of review is negligence, which is generally defined as the lack of ordinary care. Intuitively, it makes sense for actors to be judged by the standards with which they are expected to comply. However, the two types of standards need not align. In corporate law, they do not.
Corporate law is characterized by a pervasive divergence between standards of conduct and standards of review. For example, with respect to the duty of care, directors are expected to act with ordinary care, but judges will review their actions not for negligence, but for gross negligence. (2) Likewise, with respect to the duty of loyalty, directors are expected to act without conflicts of interests, but judges will review their actions for fairness, and only if there is a financial conflict of interest that rises to the level of self-dealing. (3) It is similar for the duty of good faith: directors are expected to honestly pursue the interests of the corporation and its shareholders, but judges will review their actions for intentional misconduct. (4) The wisdom of this divergence may be debatable, but its existence is not.
Courts often will speak of fiduciary duties in lofty terms but generally do not follow up with enforcement action. Ultimately, claims of breach of fiduciary duty rarely lead to liability for directors. This is a predictable consequence of the divergence. Courts often opine on the relatively demanding standard of conduct, but their judgments must be based on the more forgiving standard of review. Commentators defend this state of affairs by insisting that it provides guidance to directors without imposing ruinous liability. …