The Fiduciary Duties of Activist Shareholders

25 Nov 2008
Lynn A. Stout (Paul Hastings Professor of Corporate and Securities Law, UCLA)

Attendance at the Corporate Governance at LSE Research Debates is by invitation only. For more details please contact Sooraya Mohabeer on 020 7955 6301 or S.B.Mohabeer@lse.ac.uk

Abstract

Corporate law and scholarship generally assume that professional managers control public corporations, whiles shareholders play a weak and passive role.  As a consequence officers and directors are understood to be subject to broad fiduciary duties, while shareholders are thought to have far more limited obligations to the firm and to each other.  Outside the context of controlling shareholders and closely held firms, many experts argue shareholders have no duties as all.

The most important trend in corporate governance today, however, is the move toward greater “shareholder democracy.” Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders.

This Article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nonetheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is every reason to believe that newly empowered activist shareholders are vulnerable to the same forces of greed and self-interest widely understood to face corporate officers and directors. Corporate law can, and should, adapt to this reality.

More details will be announced soon.

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