The role of aspiration in corporate fiduciary duties.

• Author: Velasco, Julian
• Position: III. Bifurcation or Tripartition? through Conclusion, with footnotes, p. 553-586

3. BIFURCATION OR TRIPARTITION?

   Without giving it much thought, most people probably assume that the law of fiduciary duties is bifurcated. On the one hand, there are standards of conduct; on the other hand, standards of review. It might seem difficult to imagine how fiduciary duties could be described otherwise, but there is an alternative schema which is superior as a descriptive matter.

   A bifurcated view of fiduciary duties is not inherently problematic. It highlights an important distinction in the law. However, it fails to capture some important nuances. The major shortcoming of bifurcation is that it suggests that the divide is starker than it needs to be, which can easily lead to an extreme version of bifurcation that is unwarranted. Although there are only two types of standards in the law of fiduciary duties, they need not be characterized as polar opposites. Each standard need not be simply what the other is not; the two types of standards share many characteristics and are more similar than different.

   In this Part, I will challenge the assumption that bifurcation is the best way to describe the law of fiduciary duties. First, I will demonstrate that the aspirational view succumbs to the temptation of extreme bifurcation. In other words, it not only recognizes a divergence between standards of conduct and standards of review, but also describes that divergence in radical terms. Then I will argue that the divergence actually creates a tripartite division in the law of fiduciary duties. By establishing two separate thresholds, the law divides the universe of fiduciary duties into three zones. This tripartition framework is superior to bifurcation because it provides additional flexibility and allows for greater nuance.

   1. Bifurcation

      To bifurcate means "to divide into two parts or branches." (170) In one sense, then, it is perfectly fair to say that fiduciary duties are bifurcated into standards of conduct and standards of review. However, "mere" bifurcation does not say very much about either branch. Any set can be bifurcated, regardless of whether it consists of similar or disparate items. Thus, to say that fiduciary duties are bifurcated does not tell us how great the divergence is. Only through "extreme" bifurcation are the items of a set distinguished significantly.

      By definition, the aspirational view exhibits extreme bifurcation of fiduciary duties. It not only recognizes the divergence, but also describes the divergence in radical terms. This is evidenced in the language its proponents use when discussing standards of conduct and standards of review. For example, a failure to comply with a standard of review is accurately considered to be a breach of fiduciary duty. However, proponents of the aspirational view claim that a failure to comply with a standard of conduct, although not ideal, is not a breach. (171) This is not an inescapable conclusion. Under the mandatory view, a failure to comply with the standard of conduct also could be considered a breach of fiduciary duty. Unless there is also a failure to comply with the standard of review, however, the plaintiffs cannot establish a breach that would invoke judicial intervention. Similarly, standards of review are accurately considered to be enforceable. And yet proponents of the aspirational view claim that standards of conduct are unenforceable. (172) The term "unenforceable," although somewhat ambiguous, (173) is highly suggestive of an impossibility of enforcement--or at least of the inappropriateness thereof. Under the mandatory view, standards of review are simply unenforced, but potentially enforceable. Finally, standards of review are accurately considered to be mandatory. However, proponents of the aspirational view claim that standards of conduct are aspirational. (174) Again, the term "aspirational" is highly suggestive of optionality, and possibly even unachievability. (175) Under the mandatory view, standards of conduct remain mandatory and binding upon actors, even if they are unenforced. In short, the aspirational view sets up a divide that is quite extreme. By maximizing the significance of the divergence between the two types of standards, the aspirational view minimizes the significance of the standards of conduct.

      Proponents of the aspirational view often go beyond the extreme bifurcation that is inherent in the aspirational view itself. If the law of fiduciary duties is bifurcated, then one would expect both standards of review and standards of conduct to be considered law, and distinct from that which is not law. However, proponents of the aspirational view often distinguish standards of review from everything else, lumping standards of conduct together with nonlegal forces. Sometimes, they even go so far as to suggest that standards of conduct are not law at all.

      The most pronounced example can be found in the work of Professors Rock and Wachter. (176) Indeed, their entire focus is on the distinction between that which is legally enforceable that is, standards of review--and what they call NLERS, or "nonlegally enforceable rules and standards." (177) Rock and Wachter's concept of NLERS extends beyond fiduciary duty standards of conduct precisely because the relevant issue for them is legal enforcement. In other words, the difference between "legal and nonlegal enforceability" is the difference between '"law' and 'norms.'" (178) Thus, standards of conduct are relegated to the same status as any other norms or NLERS.

      Another pronounced example of this extreme bifurcation can be found in the work of Professors Hill and McDonnell. (179) Not unlike Rock and Wachter, their main distinction is between "law on the books and as enforced" (180) and "extra-legal forces ... that extend[] Delaware corporate law significantly." (181) The former category, which includes standards of review, is described as "[1] aw, in its traditional sense." (182) The latter category, which they call the "penumbra," essentially relegates standards of conduct to dictum and then lumps them together with all other "voices ... in the corporate governance debate." (183) Although their goal is not to undermine fiduciary duties, but rather to extend the reach of corporate law, they clearly view standards of conduct as having more in common with nonlegal influences than with standards of review.

      This extreme bifurcation is also evident in the legal opinions for the Disney case. For example, the Delaware Supreme Court distinguished between "the law of corporate fiduciary duties and remedies for violation of those duties" on the one hand and "the aspirational goals of ideal corporate governance practices" on the other. (184) It described the former as "minimal legal requirements" and the latter as "highly desirable" but "not required." (185) The court did not even bother to distinguish fiduciary duty standards of conduct from other aspirational goals, and it is not at all clear that it perceived any such distinction. In a later opinion, the Delaware Supreme Court similarly distinguished between "best practices" on the one hand and "the level required for a proper exercise of due care" on the other hand. 186 Likewise, the court of chancery distinguished between "ideals of corporate governance" on the one hand and "a fiduciary's duties" on the other. (187) The former are "aspirational," "worthy as goals for human behavior," and "strongly encourage[d]" by the courts, (188) but "should not work to distort the legal requirements." (189) The latter are "legal requirements by which human behavior is actually measured" (190) and "do not change over time." (191) Again, the court never clearly indicated whether there is a distinction between fiduciary duty standards of conduct and aspirational ideals of corporate governance. Given that the language of the divergence is well known in corporate law, this omission strongly suggests that any difference is, at best, irrelevant.

      In his extrajudicial writings, Veasey also distinguishes between "the law of corporate fiduciary duties and remedies for violation of those duties" on the one hand and "the aspirational goals of ideal corporate governance practices" on the other. (192) Those "aspirational goals" are standards of conduct, (193) and they do not seem to comprise "the law of corporate fiduciary duties." (194) They are only what a director should do. (195) Again, it does not seem to be relevant for Veasey to distinguish standards of conduct that are considered fiduciary duties from those that are not.

      In fairness, this extreme bifurcation is often implicit rather than explicit, and in some cases may not have been intended by the author. Nevertheless, it is important to draw this out. My concern is not so much about what particular scholars or judges believe; rather, it is about how what they say can influence the development of the law. My point is that the aspirational view tends to exhibit an extreme form of bifurcation that maximizes the divide between standards of conduct and standards of review. As I will show in the next Section, this is not the only way to interpret the divergence, nor is it the best way.

   2. Tripartition

      Although it may seem obvious to assume that the divergence between standards of conduct and standards of review leads to bifurcation, this is not the best interpretation. As a schema, bifurcation assumes that the divergence creates two zones: one for the standard of conduct and another for the standard of review. However, these two standards should not be viewed as zones. (196) Rather, they should be understood as thresholds. (197) If there are two thresholds, then there are three zones. For this reason, it is more appropriate to speak of the tripartition of the law of fiduciary duties rather than its bifurcation. The diagram below illustrates my argument.

      [ILLUSTRATION OMITTED]

      The first zone represents a failure to satisfy--that is, a failure to meet the threshold for--the standard of...