Fiduciary Law and the Modern Corporation

Abstract

Fiduciary law has been called “the heart of corporate law,” but it was not always so. From the Founding of the United States until the 1960s, most corporate governance litigation in the United States centered on charters or statutes. Over the past half century, however, fiduciary law has occupied center stage. This Article examines the role of fiduciary law in creating and sustaining the modern corporation.

Two legal innovations mark the line between the world inhabited by traditional corporations and the world with modern corporations: first, the statutory rules permitting holding companies, first adopted in the late 1880s and early 1890s, and second, the statutory reforms streamlining the merger process. Both innovations were fully incorporated into the Revision of 1896, a restatement of New Jersey’s corporations code, which was explicitly designed to facilitate the formation of modern corporations.

In antebellum America, business corporations were widely viewed as a substitute for partnerships. The special features of corporations, particularly perpetual succession and legal personality were offered by states as an incentive to encourage manufacturing and commerce. In this era, fiduciary law for corporations was not distinctive, and most courts and commentators thought fiduciary law for corporations should simply emulate fiduciary law for partnerships.

These corporations operated under a strict no-conflicts rule, which held that a conflicted transaction involving an officer or director was voidable by the corporation or the stockholders, regardless of the fairness of the terms, unless that transaction had been authorized in advance or was ratified afterwards. This rule was complemented by a strict no-profits rules, which prohibited fiduciaries from profiting from their position without the informed consent of the principal. In a world where these two rules were enforced stringently and where corporate mergers and acquisitions were rare, the primary task of fiduciary law was to prevent opportunism among co-owners.

The Civil War and the Second Industrial Revolution changed the landscape for business corporations dramatically. The Gilded Age (1865-1896) became a time of great transformation for corporation statutes, and fiduciary law was not a prominent feature of the corporate governance system. Two changes in corporation statutes during the Gilded Age transformed the use of corporations in the United States. First, by the end of the Civil War, almost all states had adopted general incorporation statutes for manufacturing firms, and during the Gilded Age, most states abandoned the system of special chartering that had prevailed during the Antebellum Period. Second, New Jersey pioneered the liberalization of general incorporation statutes to facilitate the creation of large, industrial corporations. Because the general incorporation statutes did not include regulation of conflicted transactions, and most courts had never dealt with corporations formed by general incorporation, fiduciary law was said to be “a corporate blank slate.” Filling this empty space, courts turned to trust law and agency law.