Corporate Governance

What if Contract Replaced Fiduciary Duties? A Lesson from Amirsaleh v. Board of Trade of the City of New York

By J. Robert Brown

Amirsaleh v. Board of Trade of the City of New York is a case that illustrates what can happen if Delaware gets its way in the evolution of corporate law.  It shows what can happen to shareholder rights if they become entirely a matter of contract.

Delaware has moved in a direction of allowing entities to waive all rights, including those that favor investors, if the waiver is in the formation documents. Thus, operating agreements for LLCs can include a waiver of all fiduciary duties by the managers. The statute does provide, however, that an LLC cannot waive the contractual obligation of good faith and fair dealings.

In the corporate world, the statute does not go so far. Fiduciary duties cannot be waived in toto, although companies can and usually do waive liability for breaches of the duty of care.

Amirsaleh shows how this can work in practice.The case involved a merger between two entities. The target, the NY Board of Trade, required that to have trading privileges, each member had to be an owner. When the merger took place, existing owners could either cash out or receive an interest in the merged entity, thereby retaining their trading privileges.

The merger agreement provided owners with the choice but did not require that each owner be notified of the election. It merely required that the election form "be mailed on the same date as the Proxy Statement . . . or on such date as ICE and NYBOT shall mutually agree."

In other words, the rights of the owners of NYBOT were determined by contract. The contract required mailing but did not require receipt. The undisputed facts of the case was that NYBOT mailed the election form (through the use of a third party service) but plaintiff never received it. Plaintiff, therefore, only learned of the election after the deadline passed. As a result, he received cash rather than stock and lost his trading privileges.

The court concluded that the failure to notify plaintiff did not violate the agreement. The agreement didn't require that he receive the election form, only that the form be mailed.

• Amirsaleh argues that the defendants breached the Merger Agreement because they failed to deliver to him the requisite forms to make his election and pledge his shares going forward. Implicit in this argument is the assumption that the contract granted him guaranteed delivery. The record is clear enough that Amirsalehdid not receive an Election Booklet prior to the January 5, 2007 deadline. This fact alone, however, certainly does not amount to a breach of the contract because the contract does not require delivery of the Election Forms. The terms of the Merger Agreement provide only that the Election Form "shall be mailed" to NYBOT members "on the same date as the Proxy Statement/Prospectus is mailed to the Members or on such other date as ICE and NYBOT shall mutually agree." The evidence in the record supports that such a mailing took place on December 19, 2006. Plaintiff is unable to point to any evidence that shows the existence of a genuine issue of material fact with respect to whether or not the forms were mailed.

In other words, the court was prepared to enforce a contract that did not require the entity to provide notice that an owner's interest would be liquidated and his/her trading privileges extinguished.The court did ultimately remand to determine whether the NYBOT's failure to accept the election form after the initial deadline somehow violated the duty of good faith and fair dealing.

In the LLC area, this kind of thing can happen under Delaware law. There are essentially no default rules that cannot be waived, including fiduciary duties. Under corporate law, this probably could not happen. Fiduciary duties would likely ensure that investors received proper notice.

Full post as published by The Race to the Bottom on November 24, 2008 (boomark / email).