Research Handbooks in Financial Law series
Edited by Barry Rider
Chapter 15: Fiduciary duty of loyalty
In the United States (U.S.), directors of public corporations, pursuant to state law, possess wide latitude when making business decisions. The business judgment rule, a state common law doctrine, protects directors from liability for poor business decisions provided the directors acted in good faith in an attempt to act in the best interest of the corporation, without conflicts of interest. A claim, however, involving a conflict of interest or other breach of the duty of loyalty, is afforded no such protection. The duty of loyalty requires that “the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director … and not shared by the stockholders generally.” Similarly, courts in the United Kingdom (U.K.) describe the duty of loyalty as a “duty to act in what [the director] in good faith considers to be the best interests of his company.” The U.K. recently codified much of its common law rules on the duty of loyalty in its 2006 Companies Act. This chapter traces the duty of loyalty in the U.S. and in the U.K. from Roman times to today. As demonstrated below, although the duty has evolved, the obligations derived from the law of trusts are still important today. Roman inheritance law gives our first example of an institution resembling a trust: the fideicommissio. In Ancient Rome, certain classes of people were not legally permitted to inherit land, such as unmarried adults, foreigners, and criminals.
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