Financial Articulation of a Fiduciary Duty to Bondholders with ...

More documents

Recommendations

Info

CREIGHTON LAW REVIEW [Vol. 20 then the part (2) requirement of the new fiduciary articulation simplifies into a requirement for unilateral side payments. A business judgment rule logically applies to judicial review of individual claims for unilateral side payments because there is no possible conflict of fiduciary duties regarding such claims. 256 In an individual claim for side payment, the securityholder would need to allege management's objective failure to meet the side payment requirement of the new fiduciary articulation. This would invoke entire-fairness careful-scrutiny with the burden of proof on management to show its compliance with the new fiduciary articulation. If management can show requisite "procedural fairness," then the burden of proof would shift to the securityholder to show management's noncompliance with the new fiduciary articulation: a reconstituted business judgment rule would apply. "Entire fairness" in this context logically means compliance with the requirements of the new fiduciary articulation. "Procedural fairness" in this context might include a "fiduciary compliance group" in which: (1) an independent (e.g., tenured for a fixed term) professional management committee makes the corporation's side-payment decisions - this might be "strong evidence" of fairness, 25 7 and (2) there is representation and veto power (under the new fiduciary articulation) by each class of the corporation's securityholders, with complete disclosure by management of all material facts, regarding such side-payment decisions - this might shift the burden of proof back to the securityholder plaintiff challenging such decisions. 258 In other words, some form of participation by the classes of the corporation's securityholders in the ongoing managerial decisionmaking process seems to be necessary in order to ensure protection of their economic interests. 25 9 In this context, a reconstituted 256. See supra note 218 and accompanying text. An otherwise essentially monocentric (justiciable) management decision between conflicting fiduciary duties is transformed into an essentially polycentric (nonjusticiable) decision which does not conform to the monocentric organization of our adjudicatory system. Although the new fiduciary articulation's part (2) requirement for side payments might be considered as extinguished when there is only one de facto class of the corporation's securityholders, its function of compelling appropriate corporate class payments continues to apply under such facts. For example, a claim for unilateral side payment seems to be appropriate when there is a wrongful denial of a dividend to the sole de facto class of the corporation's securityholders. 257. Cf Weinberger, 457 A.2d at 709-10 n.7, 711. 258. Cf id. at 703, 707. 259. See Jensen & Meckling, supra note 20, at 338; Smith, Jr. & Warner, supra note 39, at 130. Whereas bondholder participation on the board of directors might make such bondholders "control persons under the federal securities laws," McDaniel, supra note 71, at 441, and "'insiders' under the federal bankruptcy law," id., bondholder participation in the procedural-fairness structure would not do that because this structure is exclusively directed toward the expropriation consequences of corporate
19861 FIDUCIARY DUTY TO BONDHOLDERS business judgment rule prevents unjustified paralysis of the corporation. Thus, the objection that a "manager responsible to two conflicting interests is in fact answerable to neither" 260 is overcome by the new fiduciary articulation (securityholders' unanimity) with its procedural fairness structure. VI. CONCLUSION Our corporate fiduciary law is incongruous with the corporate-financial structure in which it is operationally embedded. Given the establishment of coherence between the theoretical structures of corporate finance and corporate fiduciary law, adjustment of our corporate fiduciary law to the less-than-ideal conditions of particular cases follows as a matter of course. Economic conflicts among the classes of the corporation's securityholders proceed from the generalized anomaly in the rule of corporate current-market-value maximization, and such conflicts are intensified through the expropriation tendency by risk-averse stockholders. In particular, bondholder-stockholder unanticipated wealth expropriations are a consequence of the failure of contractual ordering to provide perfect protection for bondholders' and/or stockholders' wealth. An equal generic managerial fiduciary duty to all the corporation's securityholders arises out of the rule of corporate current-market-value maximization, and managerial fiduciary duties to the classes of the corporation's securityholders arise out of equitable ownerships of the corporation's assets and cash flow by such classes under the Black-Scholes conception of the corporation. Fiduciary law permits compensation and the imposition of a fiduciary obligation regarding bondholder-stockholder unanticipated wealth expropriations resulting from corporate decision-making. This fiduciary obligation is the neutralizing counterpart to the generalized anomaly in the rule of corporate current-market-value maximization. Formalized as "the new fiduciary articulation," it requires the corporation and its officers and directors to: (1) maximize the present value of the returns, evaluated with respect to all eventualities, on corporate assets, and (2) make corporate side payments so all classes of the corporation's securityholders receive more or less as much wealth as decisions which are made by others. (Although side payments through this structure would not be made while there is a significant chance of corporate bankruptcy, see supra note 192, this structure's monitoring function continues to apply under such facts.) 260. Easterbrook & Fischel, supra note 2, at 1192.
Page 1 and 2: THE FINANCIAL ARTICULATION OF A FID
Page 3 and 4: 1986] FIDUCIARY DUTY TO BONDHOLDERS
Page 35: 1986] FIDUCIARY DUTY TO BONDHOLDERS

Financial Articulation of a Fiduciary Duty to Bondholders with ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?