Fiduciary Duties and the Business Judgment Rule (with the Emphasis on the Citigroup Case)

Abstract

The purpose of this paper is to examine the exact contents of the fiduciary duties of directors and managers, principally in the US. The main issue is whether current policy on applying the business judgment rule and enforcing fiduciary duties is too lenient, in the sense that it offers too much deference to the business judgment of corporate decision makers. Notably, the courts seem very reluctant to review directors’ and managers’ conduct unless there is evidence of conflict of interest. Does this abstention policy by the courts threaten to reduce the entirety of the fiduciary duties merely to an obligation not to self-deal? Arguably, this notion is enforced by the manager friendly legislation. The paper tries to determine whether the balance between authority and discretion of managers in running the company on one side, and their accountability to their principals on the other, has been shifted in favor of the former. The paper identifies key features of the laws governing fiduciary duties and the business judgment rule such as the duty of good faith, procedural due care and the duty of oversight. Consequently, it analyses all of them thoroughly, primarily focusing on the recent Citigroup case, and the approach of the Court on all of the relevant issues that was expressed in its decision. Finally, a discussion will follow concerning an optimal standard of care and liability, which would be effective in catching some dangerous forms of mismanagement currently unsanctioned by Delaware courts, and yet high enough not to allow judicial scrutiny of business decisions to become a routine practice.