Monday, May 14, 2018

A Bit More on Executive Private Lives and Fiduciary Duties

I always have loved the game of tag, and I love a challenge.  More importantly, I love a conversation about business law . . . .

Last week, Steve Bainbridge posted a follow-on to posts written by Ann and me on the application of fiduciary duties to the private lives of corporate executives.  As Steve typically does in his posts, he raises some nice points that carry forward this discussion.  In a subsequent Tweet, Steve appears to invite further conversation from one or both of us by linking to his post and writing "Tag.  You're it."

Screenshot 2018-05-14 22.50.35
I do want to make two additional points.  First, I offer an endorsement of something Steve wrote in his post.  Specifically, Steve asks (with a small typo corrected): 

 . . . to what extent should a board have Caremark duties to monitor a CEO's private life. Personally, I think Caremark is not limited to law compliance programs. A board presented with red flags relating to serious misconduct--especially misconduct in a sphere of life directly related to the corporation's business (think Weinstein)--has a duty to investigate. But, again, does that mean the board should hire private investigators to track the CEO 24/7?

I agree that a board's duty to monitor is not limited to compliance programs.  Stone v. Ritter makes it plain that the duty to monitor arises from a director's obligation of good faith, situated within the duty of loyalty.  Assuming no "intent to violate applicable positive law" or an intentionally failure to act in the face of a known duty to act (demonstrating a conscious disregard for his duties)," however, under Disney, a failure to monitor in this context likely would not rise to the level of bad faith unless the board "intentionally acts with a purpose other than that of advancing the best interests of the corporation"--which seems unlikely (although someone with more time and creativity than I have at the moment may be able to spin out some relevant facts).  Of course, the Delaware Supreme Court could add to the Disney list of actions not in good faith . . . .  But absent any of that, it is unlikely that a board of directors' failure to monitor an executive's private life will result in liability for a breach of the duty of loyalty.

Second, I want to pass on a further thought on the debate--one that is not my own.  In an email message to me, co-blogger Stefan Padfield observed that corporate opportunity doctrine questions are fiduciary duty claims that extend into a fiduciary's private life--specifically, the fiduciary's usurpation of the opportunity for his or her private gain.  He also noted that from there the leap is not as far as it may seem to conceptualizing other aspects of an executive's private conduct as being within the scope of his or her fiduciary duties to the corporation.  This certainly provides more food for thought.

I want to thank Ann for stimulating all these ideas.  Her original post raised a nice question--one that obviously provokes and has encouraged engagement in thoughtful conversation.  While we have not yet resolved the issue, we have staked out some important ground that may be covered in extant or forthcoming cases.  As Ann's and Steve's posts point out, there are a number of intriguing fact patterns at the intersection of executives' private lives and fiduciary duties that may force courts to wrestle some of this to the ground.  I, for one, will be watching to see what happens.

Ann Lipton, Corporate Governance, Corporations, Joan Heminway, Stefan J. Padfield | Permalink


Thanks, Joan. I might amend one part of the post as follows:

Corporate opportunity doctrine questions are fiduciary duty claims that extend into a fiduciary's private life--specifically, the corporation claims an executive’s private transaction for itself because, for example, it is “closely related to a business in which the corporation is engaged” (ALI s 505 as quoted in Northeast Harbor Golf Club, Inc. v. Harris).

Now I will be on the lookout for corporate opportunity doctrine over-reach.

Posted by: Stefan Padfield | May 15, 2018 2:20:05 PM

Thanks, Stefan. I appreciate the suggestion. I find your formulation interesting.

My formulation was meant to (perhaps inartfully) get at what I thought your main point was in the email message you sent me--namely, that the nature of a corporate opportunity doctrine situation is such that we must look to the life of the executive outside the firm to find the breach of duty since the executive takes the opportunity for private use. This contrasts to the point I made in my earlier post about executives being able to keep their private lives. I stated "I have trouble envisioning that the scope of service (and therefore, reach of fiduciary duties) for a typical director or officer would extend to, e.g., private ownership of other entities and decisions made in that capacity." I was not mindful of the corporate opportunity doctrine at the time I wrote that, and your message brought that lapse to my attention. Perhaps my more recent post did a poor job of making that point . . . .

Unless I am missing something, your proposed alternative text gets at a slightly different point. It focuses more on the atmosphere surrounding the corporation--its perspective--than on the role of the executive: "[t]he corporation claims an executive’s private transaction for itself." (And you cite to my favorite corporate opportunity case!) Certainly, that it an accurate portrayal of the corporate opportunity doctrine (although I tend to paint the executive as the primary actor--taking something from the corporation--rather than the corporation claiming something that is the executive's). And your alternative does mention the private transaction aspect of the claim that I wanted to emphasize. But I am not sure your proposed amendment makes the point I was trying to make in as clear or succinct a fashion.

Am I missing something in my text or your comment? Do you now understand better what I was trying to bring out in my post from the email message you sent to me? Let me know. I want to give you credit for the good ideas you have while also being faithful to the way in which you raise them.

Posted by: joanheminway | May 15, 2018 4:17:29 PM

In trying to determine the extent to which an executive’s private life could/should be subject to scrutiny via fiduciary duty law, I need to think more about the difference between coming at that question from the perspective of the fiduciary versus the corporation. I think this distinction may well capture a difference between competing versions of the corporate opportunity doctrine, with the broader formulations focusing more on the corporate perspective. Since I am looking into expanding the doctrine, I am inclined to start with the broadest formulation and that is what I was trying to get at in my rephrasing.

Posted by: Stefan Padfield | May 16, 2018 6:46:43 AM

Awesome, Stefan. Thanks so much for the inspired thoughts. I get it!

Posted by: joanheminway | May 16, 2018 8:06:46 AM

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