Directors, Not Corporations, Owe a Fiduciary Duty to Shareholders

Early Settlement ConferenceA corporation, in and of itself, is a legal entity. Laws have been established to encourage their creation to help the economy grow. It’s a vehicle by which investors can engage in business while limiting their financial and legal liabilities. Whether it’s big or small, a corporation is run by its board of directors and officers. It is these people, not the legal shell, who owe a fiduciary duty to shareholders.

Such a duty arises when there is a fiduciary relationship.

“A fiduciary relationship is ‘ “ ‘any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent. …’ ” ’ ”

Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29 (130 Cal.Rptr.2d 860).

In August, Delaware Vice Chancellor Sam Glasscock III issued a letter opinion in the case of Buttonwood Tree Value Partners LP v. R.L. Polk & Co., that discussed the principle that a Delaware corporation does not independently owe its stockholders fiduciary duties. Those duties are owed to the stockholders (and the company) by the directors and officers who are the actual actors on behalf of the company.

The plaintiffs sued both the members of the board of directors of R.L. Polk & Co. Inc. as well as the company itself, claiming that they breached of their fiduciary duties by inducing plaintiffs to sell their shares of stock for an inadequate price in a corporate self-tender. In part of the complaint, the plaintiffs claimed the corporation “failed to meet its disclosure obligations under Delaware law; aided and abetted the individual defendants’ breaches of fiduciary duties; and [was] an indispensable party to the litigation.”

The corporation moved to dismiss that count and the court agreed.

  • The court found the disclosure claims against the corporation were pleaded as claims that the company breached a fiduciary duty of disclosure to its stockholders, and that those claims failed because under settled Delaware law, a corporation does not owe fiduciary duties to its stockholders.
  • For similar reasons, Glasscock also held that a “corporation cannot aid and abet violations by the fiduciaries who serve it.”

When it comes to corporate law, one needs to know who owes what to whom, when. In this case, it’s the directors and the officers who have the fiduciary duties, not the corporation. If you have any questions about corporations and fiduciary duties, contact my office so we can talk about your situation and how the law applies to it.