The purpose of this Article is to offer a positive analysis of the common law of corporate managers' fiduciary duties. The Article attempts to explain the present shape of these corporate fiduciary duties by reference to Pareto criteria.
A particular state of affairs ("state B") is considered to be Pareto superior to another state of affairs ("state A") if at least one person in state B is better off than he or she is in state A and no one in state B is worse off than he or she is in state A. Since in a move from state A to state B, no one loses and at least one person gains, state B is considered superior to state A. Any state is Pareto efficient if no further move to a Pareto superior state is possible.
This Article proposes that corporate managers' fiduciary duties as developed through the common law are best understood as mandates from courts for corporate managers to take all actions that move corporate shareholders to Pareto superior states. This Article suggests that such an analysis enables one to discover a general consistency in the spate of seemingly confusing cases interpreting managers' fiduciary duties in such diverse matters as lock-ups, managers' freedom (or perhaps obligation) to promote the interests of constituencies other than stockholders, freeze-outs, and the meaning and applicability of the so called Revlon duties.
The Article offers not only explanations of the major cases in the area of corporate fiduciary duties but also examples of cases in which courts have varied from the requirement that managers pursue Pareto superior states. Such deviations have wrought confusion and problematic outcomes. Accordingly, in connection with the positive analysis, this Article at times offers prescriptions for rules of law that are inconsistent with managers' obligations to pursue Pareto superiority on behalf of corporate stockholders.
While all of this admittedly sounds esoteric, in fact the analysis is intended to be intensely practical by providing courts and corporate planners with clear principles that can be applied in a fashion that promotes consistency and reduces the deadweight costs of uncertainty. To assist in this practical side of the Article, references to Pareto criteria, which seem more suited to the lexicons of moral theorists and economists, are translated in Part I of the Article into the most usual and traditional corporate law language.
Rutheford B Campbell, Jr., A Positive Analysis of the Common Law of Corporate Fiduciary Duties, 84 Ky. L.J. 455 (1996).