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University of Miami Law Review

Abstract

The relationship between fiduciary duty and contract has never been clear. The law of fiduciaries has long constrained discretionary control of other people’s property, notably in corporate governance, where directors owe a corporation duties of care and loyalty. Yet, contract has also had the capacity to modify these duties in important—but uncertain—ways because neither body of law contains a meta-rule specifying which would “trump” in the event of conflict. Uncertainty was rarely problematic, however, because directors lacked the power to fully contract away their control of the corporation or their concomitant fiduciary duties.

This has changed in the past thirty years, as activist shareholders—in particular, private equity investors—increasingly use contracts to control corporations while minimizing their fiduciary risk, through the use of what we call “corporate control contracts” (CCKs)—that is, to contractualize corporate governance. Contractual corporate governance is controversial because it can vest power in a single controller, which can impair basic protections of corporate law such as shareholder voting and directors’ fiduciary duties.

Despite the controversy, Delaware recently amended its influential General Corporation Law (“DGCL”) to expand the role of contract in corporate governance while also apparently narrowing the conditions under which a contract controller would be considered a corporate fiduciary (collectively, the “Delaware Control Amendments”). Specifically, DGCL section 122(18) was added to authorize directors to fully contract away their governance powers via CCK; section 144 now implies that only the right to appoint a majority of directors will be deemed “control” giving rise to fiduciary duties pursuant to a CCK.

The Delaware Control Amendments unwittingly amplify uncertainty about the use of contract as an instrument of corporate governance because they say little about a CCK’s effect on fiduciary duties, in particular Delaware caselaw treating controlling stockholders as fiduciaries. Delaware courts assess controller status as a matter of common law through a holistic inquiry into actual control, including in transaction-specific settings where factors such as veto rights, committee influence, contractual constraints, or managerial leverage may inform, but may not themselves establish, fiduciary control over the challenged decision. The Delaware Control Amendments fail to explain their effect on the extant transactional control caselaw, and thus leave unclear whether, when, or how these and similar powers create corresponding fiduciary duties if created by CCK. Nor, for that matter, do the Delaware Control Amendments say anything about the fiduciary standards that would govern the board’s decision to enter into a CCK in the first place. Ironically, the Delaware Control Amendments would make contract a more attractive, yet less predictable, instrument of corporate governance. Despite the irony, other states (notably Texas and Nevada) have recently made similar moves.

To clarify the roles of contract and duty in the corporate context, we argue that courts, practitioners, and commentators should look to “due process” values of notice, participation, and independence to sort more from less serious problems likely to arise in the use of CCKs. Due process values have long served as a baseline check on power. Because the Delaware Control Amendments would seem to decouple power from duty, these values will be increasingly important in resolving disputes over the effect of the Delaware Control Amendments and thus in determining the legitimate force and effect of contractual corporate governance.

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