Towards a Federal Fiduciary Standards Act

Abstract

V IEWED FROM A DISTANCE, THERE IS SOMETHING SURPRISING about the fact that the legal standards that govern the conduct of corporate managers -directors, officers and controlling stockholders -differ in their source and origin depending on whether one is speaking of relations with the company itself or of relations with its security holders. At the security holder level, it is of course the federal securities statutes that have primary effect. Federal proxy and insider trading rules, together with federal disclosure requirements, are the prevailing constraints where relations between managers and investors are concerned. At the company level, by contrast, it is the statutory and common law of the state of incorporation that chiefly governs. Fiduciary limitations on dealings between the company and those who manage or control the disposition of its property have long been reserved to the states, of which Delaware, being the principal state of incorporation, is the most important. In effect, then, despite the economic identity that exists between the firm and its security holders, fiduciary obligation is at present dichotomized between federal and state legal systems which have no very close connection to one another; the federal system dominates the security holder level while the various state systems dominate at the firm level.