Business Strategists and Election Commissioners: How the Meaning of Loyalty Varies with the Board’s Distinct Fiduciary Roles

Ethan G. Stone, University of Iowa College of Law

Abstract

For twenty years, Delaware courts have been developing special standards to review board decisions that interfere with hostile bids for control or the exercise of the shareholder franchise. These “Unocal” and “Blasius” doctrines seem to fit uneasily with theories of the board’s role in corporate governance, constraining board discretion too little for shareholder primacy theories and too much for board autonomy theories. Nor have the Delaware courts succeeded in fitting Unocal and Blasius comfortably with their treatment of board decisions in other contexts. In this article, I propose that these special doctrines reflect the difference between two separate functions of the board of directors, which I term “operating power” and “coordinating power”. The board’s operating power is its familiar power to manage the operations of the corporate enterprise. The board’s coordinating power, which is at issue in Unocal and Blasius cases, is its power to manage collective actions by the shareholders. With the difference in fiduciary purpose comes a difference in fiduciary duty. In the operating context, the prototypical breach of fiduciary duty is a decision that does not pursue the interests of the corporate enterprise. In the coordinating context, the prototypical breach of fiduciary duty is a decision to force the outcome of a decision the governance scheme allocates to shareholder collective action. A further implication of the operating/coordinating distinction is that coordinating power is more amenable to fixed rules of decision. Delaware statutory rules governing the administration of shareholder voting reflect this difference and the courts’ preference for voting over tender offers seems to follow this statutory difference.

Publisher Statement

31 J. Corp. L. 893 (2006)