Academic journal article Journal of Corporation Law

Federal Corporate Law: Torts and Fiduciary Duty

Academic journal article Journal of Corporation Law

Federal Corporate Law: Torts and Fiduciary Duty

Article excerpt

Corporate governance, the traditional province of state corporate law, has long had a substantial federal component. For more than a century Congress has rejected national incorporation statutes, deliberately leaving the development of corporate governance to the states in our federal system. ' Yet in the face of scandals and disasters such as the stock market crash of 1929 and more recently after the Enron and WorldCom debacles, our national legislators and courts have recognized deficiencies in the state-based system and from time to time have provided federal rules to transcend the gaps and limits of the state system. During the 20th century federal law expanded to supplement state law fiduciary duties, either directly in the years prior to the Supreme Court's 1977 decision in Santa Fe Industries Inc. v. Green,2 or indirectly thereafter by requiring disclosure when managers misused their position. What has become clear in recent years is that federal law, as it relates to corporate governance, no longer depends on a connection to fiduciary duty, but rather is positioned as a federal alternative that has grown from the traditional common law remedy based on the tort of deceit. This Article traces the movement between these two foundations of fiduciary duty and deceit and explores the ability of a tort-based system to fulfill a governance role in corporations. That examination suggests inconsistencies in the Supreme Court's most recent treatment of securities fraud in Dura Pharmaceuticals, Inc. v. Broudo3 and exposes the overlap between the tort theory being developed in securities law and the theory found in other areas of modern tort law.

I. TRADITIONAL SECURITIES LAW: IDENTIFYING THE STATE LAW THAT NEEDS TO BE FIXED

Bob Clark's classic treatise, Corporate Law, notes that Rule 10b-5 "originated in the need, which became more pressing with the rise of the modern corporation and the national securities markets, to transcend the gaps and limits of the common law actions available to securities traders injured by false representations or failures to disclose."4 As his later discussion makes clear, the gap in state law was not always false representations, typically covered under a label of fraud or deceit and labeled within a tort rubric, but also unfair conduct by management, usually addressed by common law doctrines of fiduciary duty grouped under corporate law.5

As a way to position federal securities law and its relation to these two traditional remedies provided by state law, consider how a typical federal securities lawsuit under Rule 10b-5 relates to claims that could arise in a similar context under state law. Is federal law aimed at transcending gaps in traditional fiduciary duty or traditional common law fraud? A typical securities fraud action today would be a class action by all investors who bought (or sold) a security (to a stranger on a public market) during a class period (often a year or longer) at a price influenced by allegedly wrongful statements by the defendants (usually a company and its chief officers, but not its non-officer directors). This claim arguably substitutes for two possible claims under the common law, a cause of action arising in tort for deceit and a cause of action for breach of fiduciary duty.

In the typical deceit cause of action relating to securities, a defendant is charged with deceiving a plaintiff about the characteristics of a stock thereby inducing a plaintiff to purchase stock from the defendant at too high a price.6 In a typical fiduciary duty cause of action, an individual shareholder sues derivatively, in the name of and on behalf of a corporation, against directors who are alleged to have breached their fiduciary duty of loyalty or care in action the directors took for the corporation.7 Current federal securities claims, in substance, are doing much of the same work in monitoring management as has traditionally been done by fiduciary duty that is part of state corporate law but the legal debate is increasingly within the framework of a common law cause of action for deceit. …

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