Fiduciary Duties for Activist Shareholders

Abstract

Corporate law and scholarship generally assume that public corporations are controlled by professional managers, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely-held firms, many experts argue shareholders have no duties at all. The most important trend in corporate governance today, however, is the move toward shareholder democracy. Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly-growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders. This article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders, should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nevertheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is no reason to believe that newly-empowered activist shareholders are immune to the forces of greed and self-interest widely understood to tempt corporate officers and directors. Corporate law can, and should, adapt to this reality.