Sometimes, courts find that a manager or director of a business entity was disloyal.1 The fiduciary duty of loyalty is a lofty standard. A defendant does not have to stray far to offend “the punctilio of an honor the most sensitive.”
Under such a standard, exonerating a defendant may be difficult, even when it is the right thing to do. A defendant who is not pure as the driven snow may still not deserve liability. A judge with high standards may decline to approve of the defendant’s conduct but still want to reach the right result. When courts decline to find disloyalty, they give various reasons: the disloyalty was waived, the conduct was ratified by an appropriate constituency, or the conduct was fair.
But sometimes courts talk as if certain conduct is privileged, as if some right owned by the defendant trumped the duty of loyalty. Generally, it is a right given in the code without a hint that it relates in any way to the duty of loyalty. I find this talk troubling. The duty of loyalty is the bedrock of investor expectations. The duty requires that defendants act in good faith, i.e., that their actions serve a purpose of the entity and are not intentionally or in conscious disregard of the rights of investors. The duty demands that fiduciaries refrain from serving their own interests to the entity’s detriment. Loyalty also ensures that corporate democracy, when in place, is not undercut. Without this guardian doctrine, those entrusted with the business of others could unjustly enrich themselves or squander assets with impunity. Methods of unfair opportunism available to insiders are endless. Only an open-ended duty could catch them all.