The Painters in the Cathedral: Economic Efficiency and the Corporate Fiduciary's Duty of Loyalty

Abstract

With the Calabresi and Melamed framework as a starting point, the author studies the duty of loyalty as an entitlement, how the various remedies shape the decisions of the fiduciary, and argues for an analysis of economic efficiency that is sensitive to the institutional context. The notion that consent for release of the duty of loyalty confers an entitlement protected by the 'property rule' is examined. Whether the entitlement is protected by the 'property rule', it is argued, cannot be determined in vacuo but can only be ascertained by looking at the asset to which the duty of loyalty attaches. In the context of corporate opportunities, the possibility of surreptitious appropriation and non-detection means that efficiency is very much a function of judicial remedies rather than bargaining. Even where consent is required for transfer of the asset in question, Coasean trade presupposes that the contracting parties are in a position to appreciate their own subjective value. As this does not necessarily obtain for corporations, the author argues that the duty to provide full disclosure performs a valuable role in reducing transaction costs and enhancing the prospect of efficient trade. The duty of full disclosure is shown to be a justifiable and indeed desirable attribute. The full disclosure/equitable remedies coupling is compared to a common rule in American corporate law - that a conflicting interest transaction is not susceptible to attack if it can be shown to be substantively fair to the corporation at the time it was entered into. The last section focuses on institutional issues, in part to address the contractarian impulse to reduce transaction costs, in part to show how intractable institutional problems are. The notion of intermediated bipolarity is introduced to place the bargaining with fiduciaries in context. The strategy of re-locating decision-making from the board to the shareholders is examined for its effects both on transaction costs and economic efficiency.