What does it mean to be a fiduciary and does it really matter whether the law labels a person a fiduciary or not? Until the late twentieth century Delaware corporate law could have given a singular, coherent answer to these questions. Today, to its detriment, it is no longer able to do so.
In Delaware’s original understanding of fiduciary relations, a fiduciary was merely a legal label applied to a person who is subject to legal obligations arising from her undertaking to perform a representative position or role and her empowerment to perform that role. This conception is referred to in this article as the “power/undertaking conception” of fiduciary relations. In this conception, the fiduciary duties she owes are not the product of her being designated “a fiduciary,” rather they arise from or are implied in the undertaking and empowerment. Victor Morawetz, one of New York’s leading late-nineteenth century corporate lawyers, referred to these obligations as the “implied condition[s]” of delegated discretion. Earlier, and more foundationally, as Lord Holt put it in the 1703 case of Coggs v. Barnard: “[the] undertaking obliges the undertaker to a diligent management.” Accordingly, in this power/undertaking conception of fiduciary relations, the duty of good faith (which evolved into the business judgment rule) and the duty of care are inherent in the agreement to perform and to be empowered to perform the representational role. Similarly, the duty to avoid a conflict of duty and personal interest, which evolved in the United States to provide for fairness review of self-dealing transactions, is a corollary of the agreement to act in good faith to further the purpose for which the power was delegated—it ensures that the exercise of the delegated discretion is not infected with personal financial interest. As Lord Eldon, the father of modern fiduciary law, put it in 1802, a fiduciary cannot “manage for the benefit and advantage of himself.”
These obligations orbit the fiduciary’s exercise of delegated power. In the corporate context, as those powers are the corporation’s powers and as the corporation appoints those who exercise those powers, necessarily these fiduciary duties are owed to and enforced by the corporation. Likewise, anyone who usurps corporate power, such as a majority shareholder who controls and directs the exercise of board power, owes the consequential duties to the corporation.
This power/undertaking conception of fiduciary relations was the conception of fiduciary relations in U.S. corporate law in the nineteenth and most of the twentieth century. It is a conception upon which most of the fiduciary law taught in a JD corporations course today was structured and built. However, commencing in the mid-twentieth century, and in the late twentieth century in Delaware corporate law, a different conception of the fiduciary was born; a conception also rooted in Lord Eldon’s equity jurisprudence and the concern about the ability of one party to take advantage of and exercise undue influence over another in the context of transactions such as contracts and gifts. When applicable this undue influence doctrine required proof that the transaction was the product of a fair process, and in some instances, evidence that the agreed upon price was also fair. This doctrine, therefore, provided a separate legal pathway to entire fairness review.