Academic journal article Journal of Corporation Law

The Fiduciary Foundation of Corporate Law

Academic journal article Journal of Corporation Law

The Fiduciary Foundation of Corporate Law

Article excerpt


It is commonplace in corporate litigation to use the term "fiduciary" to describe the relationship between directors and shareholders. Fiduciary is one of those words lawyers and judges use, sometimes inaccurately, as a convenient method of categorizing a broad concept of responsibility in corporate law. It is a "loaded" term carrying a host of imbedded duties. Indeed, it is because we view corporate directors as fiduciaries that we have assigned duties to them such as the duty of loyalty, the duty of care, and the duty of disclosure. Our easy use of the term, however, sometimes renders its application inexact. In the law, it is often helpful to examine the origins of terms in order to understand their intended application. Moreover, that application, over time, may have changed. In any event, a discussion of origins, foundations if you will, cannot help but advance our analysis of legal problems.

The fiduciary concept, as we know, had its origin in the law of trusts, where its literal meaning-faithfulness-correctly described the duty or responsibility owed by one who held title, but not ownership, to property of another, who lacked legal title but could, in equity, claim the benefits of ownership. This latter individual is referred to as the beneficiary, or in earlier cases, the cestui que trust, i.e., he for whom the trust was created. The common law standards of faithfulness imposed on trustees were, of course, quite rigid. Not only was the trustee required to prudently manage the trust corpus, but the trustee was also disabled from personally dealing in trust property even if that dealing did not harm the interests of the beneficiary.

In the early development of corporate law, the trustee-beneficiary construct found ready application. In operation, the two entities, corporation and trust, were analogous in the separation of legal title from beneficial interest and in the separate, continued existence of the structure whether in trust or in corporate form. In the corporate setting, the trustees are, of course, the directors, who bear the fiduciary duty. Corporate officers, unless they also happen to be directors, are directly answerable to the directors although they are sometimes described as owing a fiduciary obligation to shareholders.

The description of directors as trustees for the stockholders was noted by the Delaware Supreme Court as early as 1922 in the case of Lofland v. Cahall,1 but the trust theory was best expressed in the seminal case of Guth v. Loft, Inc.,2 a 1939 decision in which the court applied the trust analogy to the question of corporate opportunity. In condemning the actions of directors who sought to divert a corporate opportunity to their personal benefit, the court expressed what has become, over time, a bedrock principle of corporate law.

Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers.3

Another feature of trust law that found ready application to the fiduciary relationship between corporate directors and stockholders involved the question of remedy and, specifically, the jurisdiction of a court of equity. Equitable authority, whether exercised separately as in Delaware's Court of Chancery, or concurrently as in most jurisdictions, was historically invoked to hold trustees accountable for their actions, vis-a-vis the interests of the trust beneficiaries. …

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