Fiduciary Law and Entrepreneurial Action
Abstract: When evaluating claims involving the duty of loyalty in a business organization, modern judges in the United States do something routinely that would have seemed improper to judges a century ago, something that still astonishes judges and commentators in other countries. In deciding whether business managers or other fiduciaries have breached the duty of loyalty, modern judges in the U.S. evaluate the substantive fairness of challenged transactions, and if the transactions are deemed to be fair, the fiduciaries are not liable. Substantive fairness review offers an alternative path to transactional validity not available in most countries, reflecting a fundamental policy in the U.S. of promoting action, sometimes even at the expense of vulnerable parties. The preferred path to transactional validity for conflict transactions involves ex ante disclosure of relevant conflicts and approvals by disinterested decisionmakers, either co-fiduciaries or the beneficiaries of fiduciary duties. Outside the U.S., ex ante disclosure and approval is not only the preferred path to transactional validity for conflict transactions, but generally the exclusive path. Most commentators on substantive fairness review do not recognize U.S. exceptionalism in this area, and those who do generally describe this development as an erosion of the fiduciary principle. I take a contrary position, arguing that the content of fiduciary law in the U.S. balances the desire to protect vulnerable parties with a fundamental policy of promoting entrepreneurial action. Substantive fairness review of conflict transactions is part of the institutional configuration that facilitates entrepreneurial action.
