Academic journal article Journal of Corporation Law

Fiduciary Duties Derailed? Appropriation of Directors' Duties in the Battle for Control of Conrail

Academic journal article Journal of Corporation Law

Fiduciary Duties Derailed? Appropriation of Directors' Duties in the Battle for Control of Conrail

Article excerpt

Pennsylvania law gives the board of directors of a Pennsylvania corporation a lot of flexibility to do a multitude of different things, but it certainly does not permit [them] to delegate their fiduciary duties in connection with some of the most fundamental corporate matters that can occur in the life of a corporation to someone, a third party, who has no fiduciary duties.

Attorney for Norfolk Southern, challenging the merger agreement between Conrail and CSX1

[A]ll that has happened is that the directors [on] the Conrail board decided to make certain commitments and they decided . . . that the commitments they were making were worth it as a business matter for the benefits they were receiving. That, I submit, is not an abrogation of duty, it is a fulfillment of your duty.

Attorney for Conrail, defending the same merger agreement2

I. INTRODUCTION

It is a bedrock principle of corporate law that directors are responsible for managing the business of a corporation. This concept is embodied in statutory and case law in every jurisdiction in the nation.3 Yet directors frequently confront substantial, and often conflicting, constraints on their freedom of action. Because managing the business of a modern corporation is a task too large to be accomplished by the typically small number of directors on a corporate board, directors must rely on officers, employees, and others outside the corporation to perform necessary tasks. This inevitable dependence, however, may extend only so far, since by law directors generally retain managerial responsibility for the corporation (unless the certificate of incorporation, or-in some states-a shareholder-approved by-law, provides otherwise).4 It is often difficult for directors to discern when a delegation of authority and responsibility is so great as to constitute a breach of fiduciary duty.5 This is especially so in the context of battles for corporate control.

To fulfill their responsibilities, directors may delegate responsibilities to others while retaining ultimate authority to oversee that work. They hire officers to manage the routine operations of the corporation and retain outside counsel, accountants, financial advisors, and other individuals and entities to help-the corporation achieve the corporate goals set by directors. Done properly, delegation of authority is entirely consistent with a director's fiduciary duties.6

When directors go too far in assigning their responsibilities to others, however, they abdicate their authority, and thereby commit a breach of their fiduciary duties. The power to make certain decisions, including those that affect matters of fundamental importance to the corporation, typically must be retained by directors.7 When directors decide to confer such decision-making power on others, an impermissible abdication of directorial authority may occur.

A concept related to delegation and abdication is "appropriation." Today's directors might make a decision having the consequence of eliminating or severely reducing the options that these same directors, or their successors, will have for some period into the future. Causing the corporation to enter into a merger agreement, for example, whereby the board agrees not to solicit competing merger offers until a specified future date, precludes directors from pursuing potential opportunities with other bidders until that date arrives. An appropriation also occurs when a shareholder rights plan contains a provision allowing only continuing directors, and not their successors, to redeem the rights issued pursuant to the plan. Through such provisions, today's directors appropriate for themselves some of the authority that could otherwise be exercised by tomorrow's directors.8

By using the term "appropriation," we do not mean to prejudge the question of whether an action of the directors constitutes a breach of fiduciary duty. Indeed, an appropriation by directors may or may not be such a breach. …

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