Academic journal article Washington and Lee Law Review

The Life (and Death?) of Corporate Waste

Academic journal article Washington and Lee Law Review

The Life (and Death?) of Corporate Waste

Article excerpt

Table of Contents

I. Introduction: Waste's Confusions.1240

II. Waste's Origins.1243

III. Waste's Emergence.1249

A. Compensation.1250

B. Charitable Gifts.1261

C. Political Donations.1264

IV. Waste's Work.1267

A. Waste's Frustrations.1267

B. Waste's Uses.1275

V. Waste and Good Faith .1279

VI. Conclusion: Waste's Future.1287

I. Introduction: Waste's Confusions

At first glance, corporate waste makes no sense. The classic definition of waste1-a transaction in which "what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid,"2 an act equivalent to "gift" or "spoliation" of corporate assets-suggests that waste should never arise, for what corporation would ever enter into a transaction so absurd?3 Yet waste claims are regularly made. The conventional wisdom is that waste claims never succeed;4 but empirical studies show that at some stages of litigation they do,5 and some of the most significant corporate law cases of the last decade have dealt with corporate waste.6 Respected judges have called for sharply limiting it, referring to it as a "vestige"7 and deriding it as the mythical "Loch Ness Monster" of corporate law; still, waste survives.8 It is a remnant of ultra vires, a doctrine proclaimed dead for the last hundred years-but waste is not dead.9 It confounds our model of managerial responsibility; after decades in which discussion of directors' and officers' duties have focused on the fiduciary duties of care and loyalty, waste still sits outside that framework, for waste until now has not been seen as an aspect of fiduciary duties at all.10

This Article is the first modern study thoroughly canvassing waste-its origins, growth, present role, and future prospects.11 It proceeds as follows. Part II tracks the prehistory of waste in the ultra vires doctrine-the now largely discarded set of rules that barred corporations from acting for purposes not spelled out in their corporate charters-focusing particularly on the strand of ultra vires eventually reworked as waste, the ban on gifts by a corporation.12 Part III demonstrates how this ban on gifts was, starting in the 1930s, reworked into the modern doctrine of corporate waste in a series of cases, which sought to rein in executive compensation and police the growth of new methods for compensating corporate executives.13 There is a reason waste appeared at this time, when limits on corporate activity were eroding but courts' need to investigate and cast light on questionable corporate decisions was not. Waste would be the first of a series of "equitable safety valves"-what Robert Thompson has dubbed judicial "fail-safe devices"-allowing courts to scrutinize and second-guess corporate decisions that did not clearly violate fiduciary duties, but also made little sense as the products of careful business judgment.14 This Part also shows how waste, once developed, was deployed-largely unsuccessfully-to challenge other novel corporate expenditures, notably charitable and political donations.15 Part IV follows waste's oscillating fortunes into the first decade of the twenty-first century.16 Courts were rarely comfortable with waste's ill-defined scope, letting it languish for decades, and even calling for its limitation or revision in the 1990s. Yet waste also had its uses, and occasionally found favor in courts' eyes, notably in the landmark Disney litigation.17 Part V moves toward the present day, observing that waste is losing its independent existence as courts have found in the revivified duty of good faith both an alternative doctrinal safety valve for questioning corporate decisions and a means to transplant waste into the modern framework of corporate fiduciary duties.18

II. Waste's Origins

Waste has its roots in ultra vires,19 the doctrine flourishing in the nineteenth century, which held that directors had no power to "perform[| acts outside the corporation's authority" as spelled out in its charter or general law. …

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