A Theory of Corporate Fiduciary Duties

Corporate law lacks a general theory of a board’s power as fiduciary, and consequently, the law governing corporate fiduciary duties is notably unstable. This Article offers a novel theory that grounds corporate fiduciary duties in stronger microeconomic and legal foundations. The theory, coined the Judicial Monitoring Model (JMM), shows that even imperfect judicial monitoring makes shareholders and boards better off, even when there is no claim of a breach of the duties of loyalty or care as currently understood. The JMM synthesizes the law governing corporate fiduciary duties and other doctrines that protect principals, beneficiaries, and creditors from the risk of agent misconduct due to moral hazard.

And it explains why courts evaluate corporate fiduciary conduct in some situations and defer to the board’s business judgment in others. The JMM also generates surprising empirical predictions. It predicts that, in some cases, courts can and do provide substantive review of corporate transactions even if boards are informed, disinterested, and appear to be acting in good faith. The Article finds evidence of such review in old and recent cases, including a startling number of overlooked cases involving corporate waste.