M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Monday, March 15, 2010

Fiduciary Duties and Illegal Acts

It's a little pet peeve of mine.  I really dislike those law professor hypotheticals that try to get students to rationalize how it might be a director's duty to have the corporation violate the law.  Why?  Well, because the courts are pretty clear that illegal acts are ultra vires and when a director causes the corporation to violate the law the director is not acting in the corporation's best interests and thus violates his/her duty of loyalty to the corporation.  So you can imagine how happy I was to see in the Lehman autopsy this short restatement of that law: 

The business judgment rule does not protect decisions that involve fraud or illegality. See Smith v. Van Gorkom, 488 A.2d at 873; Litt v. Wycoff, C.A. No. 19083‐NC, 2003 WL 1794724, at *6‐7 (Del. Ch. Mar. 28, 2003); In re W. Nat’l Corp. S’holders Litig., Consolidated C.A. No. 15927, 2000 WL 710192, at *26‐27 (Del. Ch. May 22, 2000). Under Delaware law, intentionally causing a corporation to violate the law is a breach of the duties of loyalty and good faith. Gifford, 918 A.2d at 357‐358. “A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006); see also Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch. 2007) (“[I]t is utterly inconsistent with one’s duty of fidelity to the corporation to consciously cause the corporation to act unlawfully.”); Metro Commc’n Corp. BVI v. Advanced MobileComm Techs., Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (“Under Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity.”); Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003) (“[O]ne cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey.”). Directors “have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators.” Desimone, 924 A.2d at 934.

-bjmq

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