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Academic

: Conglomerate

Varying Conceptions of Loyalty in Corporate Law

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

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One of the hottest topics in corporate law scholarship over the past five years has been the relationship between good faith and loyalty, a topic we have discussed frequently on this blog. In our second week of discussions "Exploring the Connection between Religious Faith and Corporate Law," I thought a discussion of this topic might be in order, especially since Lyman Johnson has written an important piece on the subject entitled, "Faith and Faithfulness in Corporate Theory."

I hope that I can be excused for a gross oversimplification of Lyman's argument, but the essence of his position, it seems to me, is that directors and officers of corporations have sufficient discretion to "draw on and express themselves in ways influenced by faith." As a result, some corporate managers might discharge their legal obligation to be ?faithful? fiduciaries by using biblical ideas:

Faithfulness in biblical teaching, therefore, although described as a spiritual quality, is to be manifested in practical allegiance to the interests of another. The stance of faithfulness toward others is to grow out of a more general stance of unselfishness in relating to others, also taught by the Bible.

This is a much more expansive notion of loyalty than generally assumed to be required of corporate managers, but it is not inconsistent with much of the recent rhetoric on loyalty in the Delaware courts. While Lyman is arguing merely for a "more prominent religious voice within corporate discourse," Andrew Gold has written an excellent new paper on "The New Concept of Loyalty in Corporate Law," 43 U.C. Davis. L. Rev. __ (2009) (not yet available on SSRN) contending that a more expansive notion of loyalty is required to make sense of Disney + Stone. Andrew argues:

The broad conception of loyalty which I will focus on here is not unique to corporate law. Instead, it is a commonly held understanding of a specific type of loyalty, recognizable in non-legal, social settings. Loyalty can encompass an obligation to be honest, to be reliable, to keep one?s word. Loyalty, in other words, can involve a type of respect toward another. This is evidenced by the kind of behavior the loyal party shows toward the beneficiary ? the means, and not just the ends, of the loyal actor are at issue.

I think Andrew and Lyman are onto something here. Though they agree that their insights (probably) will not affect the potential for liability of corporate managers, this alternative conception of loyalty may affect the way directors behave. And that would be no small accomplishment.

Full post as published by Conglomerate on May 11, 2009 (boomark / email).