Lawrence A. Hamermesh and Leo E. Strine Jr.
This chapter examines Delaware’s corporate fiduciary law, focusing on how the courts have sought to balance concerns about opportunism or carelessness, unchecked by statute, against the direct and indirect costs of resorting to litigation against directors to limit such opportunism or carelessness. It first traces the evolution of Delaware case law before discussing the institutional setting and philosophical foundations of the Delaware corporate fiduciary law. It then considers two core principles that underpin Delaware’s regulation of the fiduciaries who govern corporations: fiduciaries should have the authority to be creative, take chances, and make mistakes so long as their interests are aligned with those who elect them; in cases where there might be a conflict of interest, there are accountability tools to ensure that the stockholder electorate is protected from unfair exploitation. The chapter also explores four contexts of judicial review of fiduciary conduct involving the board of directors: the “business judgment rule,” freeze-out mergers, mergers and acquisitions (takeover defenses, change of control mergers), and voting manipulation and entrenchment.
Richard R.W. Brooks
This chapter examines the treatment of fiduciary law in the field of law and economics. It begins with a typology of three theoretical tracts that accounts for loyalty in economics: the first tract takes a structural approach to questions of loyalty and disloyalty based on models occupied by strictly rational economic agents who are unable to choose or act in any manner than that dictated by narrow self-interests; the second explains loyalty in terms of personal character or preferences for particular actions and choices; and the third approaches loyalty in terms of allegiances to relationships or associations and, more specifically, to their associated rules of conduct. The chapter then discusses these three theoretical tracts of loyalty by reviewing the law and economics literature on beneficiaries and fiduciaries in general, and principals and agents in particular. The discussion is organized along lines of the two branches of scholarship that defines the field of law and economics: institutional economic analysis and economic analysis of law.
Jonathan Klick and Max M. Schanzenbach
This chapter offers an empirical analysis of fiduciary law, focusing on whether fiduciaries react to changes in fiduciary standards and which fiduciary rules maximize social welfare. Empirical studies of fiduciary law across three areas are discussed: corporate governance, fiduciary investment, and medical malpractice. The chapter considers fiduciary principles in corporate governance by looking at the duties of care and loyalty, citing empirical evidence implying that fiduciary duties in the corporate governance context influence corporate decision-making. It also examines the law of fiduciary investment, drawing on empirical evidence across three key areas: the implementation of the Prudent Investor Rule in private trusts, management of charitable trusts and prudent distributions, and the consequences of potentially conflicted advice to retirement savers. Finally, it explores the duty of care in the context of medical provider-patient relationships and the duty of loyalty in physician-client relationships.
John C. P. Goldberg
Fiduciary duties of care are at once familiar and strange. They partake of many of the characteristics of duties of care in other domains of private law, particularly tort law. But they also bear the distinctive marks of the fiduciary context. This chapter identifies two ways in which fiduciary duties of care tend to be distinct from tort duties of care. First, with some important exceptions, they are less demanding and less vigorously enforced. Second, breaches of the fiduciary duty of care can give rise to liability even if no injury results to the beneficiary. These distinctive features, the chapter argues, reflect judicial efforts to harmonize the fiduciary’s duty of care with her duty of loyalty. As such, they are defensible, even if not in all respects justified.
Andrew S. Gold
This chapter addresses the fiduciary duty of loyalty. Loyalty is a central concept in fiduciary law, even as scholars differ on whether we should reason from fiduciary relationships to loyalty obligations, or the other way around. Nonetheless, the common view across jurisdictions and across theories is that loyalty is vital to fiduciary relationships. This chapter first provides an overview of the core features of fiduciary loyalty, with particular emphasis on the no-conflict rules, which have two basic components: a rule against conflicts of interest and a rule against conflicts of duty. It then considers the no-profit rule and how it relates to the rules against conflicts of interest, along with duties of good faith and disclosure and the link between fiduciary loyalty and other obligations. It also discusses remedies that are generally associated with breach of loyalty, including the disgorgement remedy, as well as specific contexts that modify the effect or scope of fiduciary loyalty obligations (for example, contractual modifications of legal default rules or cases where there are multiple beneficiaries), and additional factors that affect application of the fiduciary duty of loyalty. The chapter concludes with an analysis of theories that explain fiduciary loyalty as a category.
Sung Hui Kim
This chapter argues that the common law of fiduciary obligation contains an anticorruption norm, which broadly (albeit inconsistently) proscribes and remedies the use of an entrusted position for self-regarding gain. Section II begins with the conventional definition of public corruption, the use of public office for private gain, to derive a general definition of corruption that is applicable to both public and private sector contexts. Corruption is generally defined as the use of an entrusted position for self-regarding gain. Section III argues that courts have aimed to prevent corruption and invoked the anticorruption norm in cases applying fiduciary law’s proscriptive rules, the no-conflict and no-profit rules, in various fiduciary contexts. These rules are generally grounded in the rationale that fiduciaries should avoid being tempted into using their positions to seek their own advantage. Section IV argues that one of the main insights to be gained from understanding that fiduciary law contains an anticorruption norm is that fiduciary law helps to preserve and promote the legitimacy of important social institutions. While this chapter principally relies on the prevailing “public-office-centered” definition of corruption, which is used by contemporary social scientists and which attempts to identify corrupt behavior, it shows how a broader, classical understanding of corruption, which emphasizes the moral decay and depravity of an individual’s character, has also informed fiduciary law.
Henry E. Smith
This chapter explores the relationship between fiduciary law and equity, focusing on an idea that largely determines the place of fiduciary law in private law: that fiduciary law is equitable. In this regard, the term “equitable” implies that fiduciary law serves a characteristic equitable function, a function that solves problems of high variability and uncertainty through higher-order or metalaw. The prominent role played by second-order law in general and the equitable function in particular is what makes fiduciary law special among areas of private law. This chapter first identifies problems addressed by second-order law, and shows how the fiduciary relationships are equitably second order, especially for trustees, other categorical fiduciaries, and fact-specific fiduciaries. It then considers the duty of loyalty as a second-order duty equitably regulating the performance of primary duties and how fiduciary remedies for breach of fiduciary duty (for example, disgorgement) are equitably second order in a way that many prototypically private law remedies are not. Finally, it examines constructive trusts as a second-order aspect of fiduciary remedies and fiduciary law’s relation to contract law.
Howell E. Jackson and Talia B. Gillis
This chapter explores the application of fiduciary duties to regulated financial firms and financial services. At first blush, the need for such a chapter might strike some as surprising in that fiduciary duties and systems of financial regulation can be conceptualized as governing distinctive and nonoverlapping spheres: fiduciary duties police private activity through open-ended, judicially defined standards imposed on an ex post basis, whereas financial regulations set largely mandatory, ex ante obligations for regulated entities under supervisory systems established in legislation and implemented through expert administrative agencies. Yet, as the chapter documents, fiduciary duties often do overlap with systems of financial regulation. In many regulatory contexts, fiduciary duties arise as a complement to, or sometimes substitute for, other mechanisms of financial regulation. Moreover, the interactions between fiduciary duties and systems of financial regulation generate a host of recurring and challenging interpretative issues. The chapter explores the reasons fiduciary duties arise so frequently in the field of financial regulation and provides a structured account of how the principles of fiduciary duties interact with the more rule-based legal requirements that characterize financial regulation. As grist for this undertaking the chapter focuses on a set of roughly two dozen judicial decisions and administrative rulings to illustrate its claims.
This chapter explores the connection between fiduciary relationships and moral norms or standards. It first considers the distinctions between employee “loyalty,” obligations of good faith, and the duty to act in the principal’s best interests. It then examines the two moral norms covered by the fiduciary’s duty of loyalty: the “bad faith breach” norm and the “necessary fiduciary norm.” The “bad faith breach” norm prohibits the fiduciary from taking advantage of his or her position by breaching, in bad faith, a duty owed to his or her principal. This norm applies to others who are not fiduciaries, such as employees and parents. The chapter explains how the “bad faith breach” norm relates to “breach of trust” or breach of faith and how the necessary fiduciary norm is associated with the norm of natural justice, which prohibits bias in decision-making. Finally, it reviews a test case that illustrates what sort of “duty of loyalty” arises in familial relationships.
This chapter introduces the idea of a plural legal category, namely, a legal category that is deeply heterogeneous and, nonetheless, legally meaningful. More specifically, it proposes structural pluralism as an alternative to the prevailing assumption of structural monism. It argues that a wholesale category should not be a category for deciding; pigeonholing a case within its ambit is not enough to justify any concrete decision. At times, however, holding on to such a category can still be useful because some heterogeneous legal categories can function as categories of thinking. Thus, a wholesale legal category is theoretically important if its subcategories raise questions that invoke similar normative concerns or imply some similarity in the means that inform their pertinent answers. This chapter offers an account of plural legal categories and demonstrates its promise regarding fiduciary law, which it analyzes as a classic example of a plural legal category. It also discusses autonomy-based pluralism in fiduciary law and shows how, despite the significant differences between various fiduciary types, their structural similarities could facilitate learning and cross-fertilization and thereby justify holding such diverse categories as money managers, parents, and sovereigns under the unified umbrella of fiduciary law. Furthermore, since many fiduciary types enhance autonomy, the pertinent subsets of fiduciary law dealing with the facilitation of various forms of money management and division of labor can and should be critically examined against this important function of liberal law.
This chapter considers the psychology of fiduciary law, with particular emphasis on how the principal-agent dynamic affects judgment and decision-making. From a decision-making perspective, a characteristic of fiduciary behavior is that fiduciaries choose for others. Behavioral decision research has focused on the ways that actors decide differently when they are acting for others rather than acting for themselves. To introduce readers to the psychology of self-other decision-making, this chapter reviews the theoretical framework within which these questions have been situated, along with some of the most relevant and intriguing experimental research. Three principal areas of research are discussed: the effect of social distance on the mental operations utilized in judgment under uncertainty; the moral psychology phenomena around navigating conflicts of interest; and the specific social dynamics of deciding in the context of a relationship, whether one-shot or ongoing. The chapter examines the concept of “psychological distance” as an integral component of construal level theory, and the extent to which heuristics and biases are acute for agents and principals. Along the way, Prospect Theory and concepts such as loss aversion, risk perceptions, intertemporal discounting, self-serving biases, disclosure approaches to regulating conflicts of interest, impression management, accountability, and hindsight bias are explored.
This chapter examines the relationship between fiduciary law and social norms—norms that guide conduct with reference to social expectations as opposed to universal morality, for example. It first considers a number of questions about the relation of law and social norms in general; for instance, whether law’s coercion suppresses or interrupts social norms that might flourish in its absence, or under what circumstances should law enable and bolster social norms and why. It then discusses the ways in which fiduciary law interacts with three types of social norms: norms of trust and trustworthiness, norms of loyalty, and norms of altruism. In particular, it explores those aspects of fiduciary law that suggest a balance between trust and detachment, along with fiduciary law’s link to contract law. Finally, it describes how social roles, such as the role of trustee or company director, interact with both social norms and fiduciary law.
Hillary A. Sale
This chapter uses corporate law as a case study to evaluate the content of the fiduciary duty of good faith. Tracing its development from Van Gorkom through to the present, the chapter shows how good faith, though part of the duty of loyalty, has become a gap filler, policing the space between generally exculpated breaches of care and the more obvious breaches of loyalty. This chapter also surveys good faith case law to show the most common “red flags” for which corporate officers and directors should be monitoring. An analysis of two of the most recent good faith cases—City of Birmingham and In re Wells Fargo—show how the theory of publicness can be used to predict future good faith developments. Finally, the chapter ends by showing that the duty of good faith’s expansion into trust law parallels its corporate development by emphasizing its gap-filler function.
Ethan J. Leib and Stephen R. Galoob
This chapter examines how fiduciary principles apply to public offices, focusing on what it means for officeholders to comport themselves to their respective public roles appropriately. Public law institutions can operate in accordance with fiduciary norms even when they are enforced differently from the remedial mechanisms available in private fiduciary law. In the public sector, fiduciary norms are difficult to enforce directly and the fiduciary norms of public office do not overlap completely with the positive law governing public officials. Nevertheless, core fiduciary principles are at the heart of public officeholding, and public officers need to fulfill their fiduciary role obligations. This chapter first considers three areas of U.S. public law whose fiduciary character reinforces the tenet that public office is a public trust: the U.S. Constitution’s “Emoluments Clauses,” administrative law, and the law of judging. It then explores the fiduciary character of public law by looking at the deeper normative structure of public officeholding, placing emphasis on how public officeholders are constrained by the principles of loyalty, care, deliberation, conscientiousness, and robustness. It also compares the policy implications of the fiduciary view of officeholding with those of Dennis Thompson’s view before concluding with an explanation of how the application of fiduciary principles might differ between public and private law settings and how public institutions might be designed or reformed in light of fiduciary norms.
D. Theodore Rave
This chapter examines the fiduciary nature of state authority. It begins with a historical background on how state authority has been conceived in fiduciary terms as far back as Plato, Cicero and Locke. It then surveys modern conceptions of the sovereign state as a fiduciary for the people subject to its power and explores applications of fiduciary political theory to. state agencies and public officials. A fiduciary view of state authority need not equate to a grand unified field theory of political legitimacy. But drawing on lessons from fiduciary law’s approach to similarly structured governance problems in the private realm can shed new light on perennial problems of public law. The chapter considers how fiduciary principles have been applied to the state across a variety of contexts, including the Indian trust doctrine, the public trust doctrine in natural resources law, administrative law, and constitutional law. Finally, it discusses various conceptions of the fiduciary state’s duties of loyalty and care to its subjects, along with remedies available when those duties are breached.
Deborah A. DeMott
This chapter identifies the fiduciary principles that are integral to agency relationships as defined by the common law and explores their implications. In contrast to relationships in which a fact-specific assessment of a relationship and its circumstances trigger the application of fiduciary duties, agency relationships are categorically treated as fiduciary. When a relationship of common-law agency links two persons, one person’s actions can directly carry legal significance for the other. Agency doctrine defines and imposes formal structure on consensual relationships in which one actor has legally consequential power to represent the other, encompassing externally oriented consequences for the principal, the agent, and third parties, as well as internally oriented rights and duties between agent and principal. An agent functions not as a substitute for the principal but as an extension of the principal’s legal personality in dealings with third parties and other externally oriented conduct within the scope of the agency relationship, including knowledge of facts acquired by the agent when material to the agent’s duties. The potentially grave impact for the principal, plus the implications for personal autonomy when one person represents another, underlie the requisites that define an agency relationship, including its fiduciary character.
Andrew F. Tuch
This chapter examines fiduciary principles in banking law, focusing on both commercial and investment banking. It considers when fiduciary duties exist and what they require, the range of remedies available for breach, and the various techniques banks use to exclude or modify fiduciary duties. One puzzling feature of the legal landscape is that clients bring actions less often than banks’ size and conduct might suggest, contributing to legal uncertainty. Fiduciary law nevertheless constrains banks’ activities: courts have cast banks as fiduciaries in all of the major commercial and investment banking functions, including making loans and accepting deposits, advising on merger and acquisition transactions, and underwriting securities offerings, although banks face greater risk in some areas than others. Banks have responded by disclaiming fiduciary duties and using information barriers/Chinese walls, and yet recent judicial decisions refuse to accept these measures as automatically effective for avoiding fiduciary liability. Courts insist that they, rather than the parties themselves, determine whether fiduciary duties exist and what they require. The law thus diverges from some theoretical accounts of fiduciary doctrine, posing challenges for banks and new questions for scholars.
John A. E. Pottow
This chapter examines fiduciary duties in bankruptcy and insolvency, focusing on the bankruptcy trustee’s duties, which are triggered by virtue of appointment in a case. It first provides a background on bankruptcy law in order to elucidate the doctrines and rules affecting fiduciary responsibilities in bankruptcy, citing a number of relevant provisions in the Bankruptcy Code. It then considers the fiduciary, non-fiduciary, and anti-fiduciary obligations of the trustee under the Bankruptcy Code before discussing the fiduciary duties of care and loyalty. In particular, it highlights bankruptcy-related issues raised by the duty of loyalty with respect to secured creditors, priority unsecured creditors, general unsecured creditors, and debtors. It also explores the byzantine protective remedies available to trustees should there be a breach of fiduciary duty and concludes with an analysis of miscellaneous additional duties of the trustee in insolvency, as well as the unique challenges the debtor-in-possession (DIP) faces with its duty of loyalty. The chapter suggests that the Bankruptcy Code has many safeguards designed to confront conflicting creditor incentives, both against the DIP and in insolvency, that help fill the gaps left by reliance upon fiduciary duty law alone.
Lloyd Hitoshi Mayer
This chapter provides an overview of the fiduciary principles that apply to charities and other nonprofit organizations. More specifically, it discusses the criteria that trigger a fiduciary relationship, the duties of loyalty and care, other legal obligations that may apply to nonprofit fiduciaries, and the extent to which those duties and obligations may be modified or avoided. In the course of doing so, it draws upon applicable state law, applicable federal tax provisions, and various model and uniform acts. It also discusses and critiques the approaches taken to these principles by the draft Restatement of the Law, Charitable Nonprofit Organizations.
Nicholas C. Howson
This chapter examines the principles of fiduciary doctrine that are found in Chinese law, with a particular focus on developments in law and regulation in the People’s Republic of China (PRC) after the early 1980s. It also considers the advent and elaboration of what the Anglo-American legal system calls “corporate fiduciary duties,” including partnership fiduciary duties. The chapter first provides an overview of basic conceptions of corporate fiduciary duties that entered Chinese law and practice through at least three separate tracks: academic, regulatory, and jurisprudential. It then explores corporate and partnership fiduciary duties after 2006, placing emphasis on corporate law and the law on partnerships, before discussing how corporate fiduciary duties are understood and applied by state institutions and private parties. More specifically, it explains how the Chinese courts have engaged with the idea of corporate and partnership fiduciary duties in the period after 2006, and how these doctrines have been formalized in law. The chapter shows how a particular set of legal doctrines originating in a distinct legal, political, and economic system have been given life in large part by private actors, namely, domestic PRC investors, managers, and state institutions, rather than the demands of foreign investors.