Fiduciary Duties from an Economic Perspective
Fiduciary duties—loyalty and care—are among the most important concepts in corporate law. Economic analysis illuminates their function and provides guidance for their application in novel contexts.
The Economic Function
Gap-Filling
Complete contracts are impossible. Fiduciary duties fill gaps by imposing obligations that parties would have agreed to had they anticipated specific situations. They reduce contracting costs by providing default rules.
Deterrence
Fiduciary duties deter opportunistic behavior by imposing liability for self-dealing and negligence. The threat of liability aligns fiduciary incentives with beneficiary interests.
The Duty of Loyalty
Self-Dealing Transactions
The duty of loyalty addresses conflicts of interest. Economic analysis suggests that self-dealing should be permitted when procedural protections—independent approval, full disclosure—ensure that transactions benefit the corporation.
Corporate Opportunities
The corporate opportunity doctrine prevents fiduciaries from diverting valuable opportunities. The doctrine's boundaries should reflect the costs of foregone opportunities against the costs of restricting fiduciary freedom.
Competition
Restrictions on fiduciary competition protect against misappropriation of corporate resources—information, relationships, expertise. The scope of restrictions should reflect the magnitude of these concerns in specific contexts.
The Duty of Care
The Business Judgment Rule
Courts defer to business decisions under the business judgment rule, recognizing that hindsight bias and judicial incompetence make substantive review problematic. This deference is economically sound—it encourages risk-taking and reduces litigation costs.
Gross Negligence Standard
The gross negligence standard for care violations reflects the difficulty of distinguishing bad decisions from bad luck. Only egregious failures warrant liability; ordinary mistakes do not.
Oversight Liability
Caremark duties require directors to implement monitoring systems. This obligation addresses the agency costs of managerial misconduct by creating board-level accountability for compliance failures.
Modification by Contract
Exculpation Clauses
Delaware permits exculpation of care but not loyalty violations. This distinction reflects the greater severity of loyalty breaches and the difficulty of contracting around conflicts of interest.
Fiduciary Duties in LLCs
LLC statutes permit substantial modification of fiduciary duties. This flexibility allows parties to customize governance arrangements but creates risks when bargaining power is unequal.
Conclusion
Fiduciary duties serve essential economic functions in addressing agency costs. Their application should reflect these functions, with courts calibrating scrutiny to the magnitude of agency problems in specific contexts.