Directors’ Duties and Legal Safe Harbours: A Comparative Analysis
Few areas in corporate governance are of more interest -or relevance - to company directors and their legal advisors, than the topic of directors’ duties. Directors’ duties are a central feature of corporate regulation and accountability, yet a variety of legal safe harbours, such as the business judgment rule and exculpation clauses,ultimately shape the contours and stringency of these duties in practice. Although the standards of conduct for directors’ duties are often relatively strict, legal safe harbours can dilute these standards and reduce the likelihood of findings of breach. This potential gap between the standards of conduct expected of company directors and enforcement of those standards by the courts has been labelled ‘acoustic separation’. This gap is particularly striking in the context of the duty of care as it applies to company directors.
Our Working Paper, ‘Directors’ Duties and Legal Safe Harbours: A Comparative Analysis’, explores, from a comparative law perspective, differences in the shape of directors’ duties and the legal safe harbours that accompany those duties. In this paper, which will appear in the book, Research Handbook on Fiduciary Law (D.G. Smith & A.S. Gold, eds, Edward Elgar, UK, forthcoming 2017), we examine directors’ duties, with particular attention to the duty of care, in the United States (specifically Delaware), the United Kingdom and Australia. As our paper shows, there are striking differences in the law relating to directors’ duties in these three jurisdictions.
First, in contrast to Delaware, where all duties owed by directors tend to be classified as ‘fiduciary’ in nature,modern UK and Australian courts have departed from this approach, limiting the term ‘fiduciary’ to ‘proscriptive’ duties, which are peculiar to fiduciaries, and not owed by any other actors. Under this approach, Anglo-Australian law does not treat the duty of care as a ‘fiduciary’ duty.
Secondly, there are fundamental differences in the contours of directors’ duties and the methods of avoiding breach. In Delaware, the modern judicial standard for breach of the duty of care, as shaped by the business judgment rule, is notionally the same as the standard that applied in 18th century England –one of ‘gross negligence’. In fact, however, the modern Delawarestandard is even lower than this in practice, due to the operation of exculpatory charter clauses. In contrast to the position under Delaware law, the standard for breach of the duty of care under modern UK and Australian case law has risen considerably from its origins and is now considerably higher than a ‘gross negligence’ standard.
Thirdly, unlike Delaware corporate law, which relies only on equitable directors’ duties, modern Anglo-Australian company law involves complex interaction between general law and statutory directors’ duties. The statutory duties, however, operate quite differently under UK and Australian company law. Whereas in the United Kingdom, the Companies Act 2006 now creates anexclusively statutory regime for directors’ duties, supplanting the prior general law principles, Australia’s statutory regime under the Corporations Act 2001 explicitly preserves, in a parallel regulatory universe, the operation of directors’ duties at general law.
Enforcement of statutory directors’ duties under Australia’s civil penalty regime also differs radically from enforcement in the United States and the United Kingdom, both of which rely primarily on private enforcement. Australia, on the other hand, has a primarily public enforcement regime, under which the regulator, the Australian Securities and Investments Commission (‘ASIC’), is the main enforcement agent forbreach of the statutory directors’ duties.
These divergent regulatory choices have significant enforcement ramifications. In the United States and the United Kingdom, for example, there are virtually no contemporary examples of successful actions against public company directors for breach of the duty of care. The same is certainly not true in Australia. Recent case law has also accepted that the statutory duty of care is not only a private, but also a public, wrong, and that there is a public interest in the enforcement of directors’ duties in Australia.
Legal safe harbours create another level of complexity that may affect directors’ duties. These safe harbours can alter the shape, scope and enforceability of duties and create a disjuncture between law on the books and law in practice. Our paper concludes by examining interesting differences between the United States, United Kingdom and Australia in the operation of two classic legal safe harbours - the business judgment rule and exculpatory clauses. Our analysis of the interaction between directors’ duties and legal safe harbours has a direct bearing on the effectiveness of directors’ duties as a regulatory technique in the United States, the United Kingdom and Australia.