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CALIFORNIA CORPORATE & SECURITIES LAW

Professor Bainbridge On My “Beef” With Gantler v. Stephens

Professor Stephen Bainbridge yesterday provided a well considered assessment of my “beef” with the Delaware Supreme Court’s holding in Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009) that “the fiduciary duties of officers are the same as those of directors”.  To the extent that Professor Bainbridge is saying that officers are not agents “pure and simple”.  I agree.  Officers are agents of the corporation, just not “pure and simple” agents.  As agents, their relationship to the corporation is governed by a complex web of contract, agency, and common law principles.

Professor Bainbridge begins his critique by pointing out that the Model Business Corporation Act defines the fiduciary duties of officers:

First question, if officers are agents–pure and simple–why did the drafters of the Model Business Corporation Act feel it necessary to lay out both standards of conduct and standards of liability for officer? The MBCA had to do so for directors, who are fiduciaries but not agents, so as to define the directors’ duties because agency law was not applicable. The decision to do so for officers therefore implies that even if officers are agents, they are a special sort of agent.

My response to this is that neither California nor Delaware felt any compulsion to define the standards for officers in their general corporation laws.  This rare instance of agreement between the two states’ corporate law suggests that some other law (contract, agency, common law?) made it unnecessary for the corporate law to separately define standards for officers.

Professor Bainbridge next points to Section 291 of the Restatement (Second) of Conflicts of Laws (1971).  The general rule (applying the lex incorporationis) comes with a notable exception”where, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the parties and the transaction, in which event the local law of the other state will be applied.”  Here in California, most Delaware corporations have no or very little contact with Delaware other than the locus of their parturition.  In Gantler, the corporation was headquartered in Ohio and seemingly had all of its operations there.  When a relationship is formed and to be performed entirely in one state, that state has a good start on a claim to having the most significant relationship.

I agree, of course, with Professor Bainbridge that a court is not obligated to address legal issues that were not raised by the parties.  My point is not to criticize the court for failing to address choice of law, but as Professor Bainbridge notes, for its asseveration that “the fiduciary duties of officers are the same as those of director”.

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