Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty.

AuthorPace, H. Justin

TABLE OF CONTENTS ABSTRACT 1 TABLE OF CONTENTS 3 I INTRODUCTION 4 II LEGAL DOCTRINE 6 A Section 102(b)(7) 8 B Open Questions 10 III ETHICAL FRAMEWORK 14 A Utilitarianism 16 B Liberalism 18 1 John Rawls' Theory of Justice 19 2 Robert Nozick's Entitlement Theory 22 C Communitarian Models 25 1 Populist Communitarianism 26 2 Catholic Social Thought 32 IV RIPPED FROM THE HEADLINES 41 A Uber and Its Guerilla Regulatory Tactics 41 B The "Legal" Marijuana Industry 43 C Google and Board Imprimatur for Sexual Harassment 45 D Dick's Sporting Goods and Walmart Violate Civil Rights Laws by Refusing to Sell Guns 47 V APPLYING THE LEGAL AND ETHICAL FRAMEWORK 49 A Communitarian Models 52 1 Populist Communitarianism 53 2 Catholic Social Thought 54 B Utilitarianism 56 C Liberalism 60 1 Robert Nozick's Entitlement Theory 60 2 John Rawls' Theory of Justice 62 VI CONCLUSION 65 I. INTRODUCTION

What do Uber's regulatory strategy, "legal" marijuana dispensaries, Google's handling of sexual harassment, and Dick's Sporting Goods' decision to stop selling long guns to eighteen- to twenty-year-olds (1) all have in common? They all implicate business decisions that would be protected by the business judgment rule but for an embedded violation of law. The treatment of corporate violations of law at the board's direction under Delaware fiduciary obligation doctrine is an underappreciated topic. Rather than the business judgment rule, such violations trigger a per se standard of liability.

Negligence per se is "[n]egligence established as a matter of law, so that breach of the duty is not a jury question," usually arising "from a statutory violation." (2) It is easier for a plaintiff to plead and prove a claim for negligence where the negligence per se doctrine applies. An analogous per se doctrine for another claim would have the same effect, including for claims more difficult to plead and prove than negligence. (3) A per se standard appears to apply in corporate law to breach of fiduciary duty claims where the corporate directors direct the corporation to violate positive law. Normally, the business judgment rule largely insulates directors from liability for breach of fiduciary duty absent a conflict of interest. One way to circumvent the business judgment rule is by alleging the directors failed to properly monitor the corporation under the rule laid out by the Delaware Court of Chancery in Caremark. (4) But a Caremark claim is "possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment." (5) A per se theory for breach of fiduciary duty for violating positive law, on the other hand, raises the possibility of a much easier judgment to win.

This Article will consider when a violation of law is a breach of fiduciary duty, whether and when it is a breach of fiduciary duty per se, and whether such a breach is and should be subject to exculpation in a corporate charter. A violation of positive law may be relevant in two contexts. The first, and most straightforward, is where the board directed the corporation to violate the law. The second is a failure to monitor claim under Caremark. This Article will also address relief, including the appropriateness of injunctive relief and nominal damages where the violation of law maximizes shareholder wealth but is socially detrimental. This Article will focus on Delaware law in the corporate context (limited liability companies raise their own distinct issues).

The possibility of liability for breach of fiduciary duty per se has important moral and ethical implications. This Article will consider the ethical implications after establishing the legal framework. The dominance of law and economics in corporate and entity law makes utilitarianism the de facto default ethical framework for examining corporate law issues. But as this Article will show, utilitarianism is unsatisfactory and too limited for the purposes of this scenario. This Article will also apply and consider both the Rawlsian and Nozickian strains of liberalism. And given the recent turn away from liberalism on both the American political Right and the American political Left, this Article will look at the issue through the lenses of two non-liberal frameworks, Catholic Social Thought and a populist version of democratic communitarianism.

Finally, this Article will consider various corporate lawbreaking scenarios in light of these frameworks. Particular attention will be paid to Dick's Sporting Goods' and Walmart's corporate decisions to stop selling firearms to eighteen- to twenty-year-olds, thus violating state law prohibitions on age discrimination in public accommodations. After considering and critiquing each moral theory in the context of examples of corporate lawbreaking, the Article will conclude with a recommendation for how fiduciary obligation law should regard "rogue" corporations. (6)


    Corporations do not purely exist as a nexus of contracts. (7) They are creatures of statute, operating under statutory grants of authority. (8) Despite the modern, loose approach to those grants, they still operate to cabin corporate actions.

    Delaware law (9) requires corporate directors exercise the same level of care as "ordinarily careful and prudent men would use in similar circumstances." (10) Despite the resemblance to the traditional negligence standard, directors have almost never been held liable for breaches of fiduciary duty under an ordinary negligence standard. (11) Application of an ordinary negligence standard is largely foreclosed for most board actions by the business judgment rule. (12) But if acts that violate law fall under the duty of loyalty rather than the duty of care, then they would not fall under the protection of the deferential business judgment rule. (13)

    First, some history regarding the division of fiduciary duties in Delaware: The Delaware Supreme Court's decision in Cede & Co. v. Technicolor led to considerable speculation that there existed a "triad" of fiduciary duties under Delaware corporation law--the traditional duties of care and loyalty and, now, a duty of good faith. (14) The Delaware Supreme Court made clear in Stone v. Ritter, though, that the duty of good faith was a component of the duty of loyalty rather than a separate, standalone fiduciary duty. (15) The addition of the duty of good faith expanded the scope of the duty of loyalty. The duty of loyalty is no longer concerned solely with self-interested transactions; now, the duty of loyalty is omnipresent because every act by a fiduciary on the corporation's behalf must have a proper corporate purpose. (16)

    Folding good faith into the duty of loyalty extends that duty to prohibit not just self-interested actions but also to prohibit unlawful conduct. A director must "exert all reasonable efforts" to protect the interests of the corporation, but those efforts are narrowed: they must be lawful. (17) In listing the ways in which a board might fail to act in good faith, the Delaware Supreme Court included "where the fiduciary acts with the intent to violate applicable positive law." (18)

    Directors are fiduciaries of the corporation. (19) When they act within a proper corporate purpose, they act on behalf of the corporation. The corporation has effectively delegated certain monitoring and decision-making authority to the directors (acting collectively as part of the board). Thus, the authority of the directors extends no further than the power of the corporation to act. This is retired Chief Justice of the Delaware Supreme Court Leo E. Strine's logic in characterizing corporate existence as being premised on a "nondefeasible promise" to "conduct only lawful business through lawful activities." (20) The Delaware General Corporation Law is permissive, but it limits corporations to "any lawful business or purpose." (21) A parallel can be drawn with the requirement that contracts be formed for a lawful purpose to be enforceable.

    Defining a violation of law as bad faith would further seem to foreclose a safe harbor for interested transactions. Under the Delaware statute, a transaction is not voidable on the basis that it is interested if it is affirmed by a majority of disinterested directors or by a majority of disinterested shareholders. (22) But the statute qualifies this by providing that the approval must be in good faith. (23) Strine suggests that the good faith qualification means interested transactions that violate the law cannot be cleansed and thus are always voidable. (24) There is some logic to this in that violations of law fit poorly with the directors' duties to act in the best interest of the corporation. But it stretches logic to assume that the Delaware legislature intended to treat violations of law more harshly than the conflicted transactions that sit at the heart of the duty of loyalty doctrine.

    A. Section 102(b)(7)

    Delaware's division of the fiduciary duties owed by directors to the corporation between the duties of loyalty and care is a distinction with a difference. Violations of the duty of care may be exculpated in the corporate charter under Delaware General Corporation Law Section 102(b)(7). Section 102(b)(7) endorses inclusion in a Delaware certificate of incorporation of a "provision eliminating or limiting the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director." (25) But it also sets limits on that power to exculpate directors from liability for breach of their fiduciary duties. The certificate of incorporation may not limit liability for "breach of the director's duty of loyalty." (26) Importantly for the purposes of this Article, Section 102(b)(7) also prohibits limits on liability for "acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law." (27)

    The Delaware Court of Chancery has clarified the applicability of...

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