A Defense of the Corporate Law Duty of Care

ion, the difference between the two perspectives can seem to fade into insignificance. On the one hand, fiduciary law is perfectly capable of accommodating nonmandatory obligations. Fiduciary law scholars readily acknowledge that, under certain circumstances, shareholders should be permitted to waive at least some fiduciary duties. 141 Generally, they simply want to put in place sufficient safeguards to ensure that the waiver is informed and voluntary 14 2 (although in certain cases or extreme circumstances, they may want to reserve the right to prevent or disregard a waiver). 14 3 On the other hand, contractarian theory can and must accommodate mandatory terms. 14 4 For example, all contractual relationships would weaken important protections). See also John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 COLUM. L. REV. 1618 (1989) (explaining shortcomings of the contractanan view). 137. In particular, proponents of the contractarian argument tend to rely on the disciplinary effect of market forces to argue against the duty of care. See supra Part II.C.2. 138. Easterbrook & Fischel, supra note 135, at 426 ("[T]he duty of loyalty is a response to the impossibility of writing contracts completely specifying the parties' obligations."). 139. See supra notes 74-75, 95 97 and accompanying text. 140. If the contractarian argument is correct, then both the duty of care and the duty of loyalty are merely default rules. By contrast, if the argument is wrong, then both are legal duties. However, considering fiduciary duties to be law does not require that they be entirely mandatory, because they could be waivable duties, or simply repealed. 141. See, eg., Frankel, supra note 129, at 1231 ("There are good reasons for viewing fiduciary rules as default rules and for enforcing the parties' bargain around them."); Coffee, supra note 136, at 1690 ("[T]here is a middle ground. courts can tolerate and monitor some departures in this area, much as they have done in other forms of contracting. The relevant task for the future then should be to define the area of tolerable departures, rather than to prolong the holy war over opting out."). 142. See, e.g., Frankel, supra note 129, at 1230 ("Even if fiduciaries may make such requests [i.e., for a waiver of a duty], the nature of the relationship requires that the parties follow a unique procedure when they bargain around these duties[j"); Coffee, supra note 136, at 1624 ("[D]epartures from the default rules of fiduciary duty must be sufficiently specific and bounded to permit the departure to be accurately priced."). 143. See, eg., Frankel, supra note 129, at 1214 ("[C]ircumstances exist where fiduciary duties are not waivable for reasons such as doubts about the quality of the entrustors' consent (especially when given by public entrustors such as shareholders), and the need to preserve institutions in society that are based on trust."); Coffee, supra note 136, at 1624 ("Beyond [a] mandatory minimum, the parties are free to contract around those fiduciary norms that require selflessness, but not around those that seek to prevent fraud and opportunism."). 144. See, e.g., Easterbrook & Fischel,supra note 135, at 429 ("[L]egislatures often create nonwaivable rules. 2015] The Journal of Corporation Law contracts are subject to laws of general applicability that prohibit or compel certain behavior. In addition, contract law itself has many mandatory rules. Ultimately, any law could be understood as a mandatory contractual term, and fiduciary duties could be counted among them. I do not mean to suggest that the difference between law and contract is irrelevant. To the contrary, it can be very important when dealing with particular issues. 145 My point is simply that either concept can be subsumed by the other when considered at a sufficiently general level. Therefore, the extent to which fiduciary duties generally (and the duty of care in particular) should be mandatory is a policy question that depends upon other factors. The label "contract" (or "law" for that matter) does not have talismanic significance. The corporate law duty of care already does, to a large extent, operate contractually. In states such as Delaware, a corporation can choose whether to amend its charter to eliminate directors' personal liability for breach of the duty of care-but not of the duty of loyalty. 146 To be fair, such an option is not perfectly contractual: it does not empower the parties to determine the exact level of care they would like, but only allows for a limited set of options. There does not seem to be flexibility to impose a higher standard, such as ordinary negligence, 1 nor a lower standard, such as the elimination of injunctive relief 148 However, there is not much of a public outcry for either option. On the bottom-line question of whether or not there should be personal liability for breach, the corporate law duty of care is largely contractual (while the duty of loyalty is not). However, the contractarian argument logically cannot support the elimination of the duty of care-or of any duty. Contractarians should be as opposed to the elimination of the duty of care as they are to its