Business Law

Selected Developments in Business Law — Understanding Fiduciary Duties in Business Entities

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Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the March 2020 update to  Understanding Fiduciary Duties in Business Entities.  References are to the book’s section numbers. See CEB’s BLS Landing Page for special discounts for Business Law Section members.  The most significant legal developments since the last update include developments in such important topic areas as fiduciary duties in for-profit corporations; fiduciary duties in family businesses; duties of investment advisers and broker-dealers; breach of fiduciary duty litigation; and D & O insurance. 

March 2020 Update

Fiduciary Duties in For-Profit Corporations

The internal affairs doctrine is a long-standing conflicts-of-law principle that recognizes that only one state should have the authority to regulate a corporation’s internal affairs—namely, the state of incorporation. Internal affairs are matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders. Drulias v 1st Century Bancshares, Inc. (2018) 30 CA5th 696, 705 (forum selection clause for intracorporate disputes in bylaws of Delaware corporation enforced; no California public policy implicated); The Police Retirement Sys. of St. Louis v Page (2018) 22 CA5th 336, 340. See §4.4.

In In re Pilgrim’s Pride Corp. Derivative Litig. (Del Ch, Mar. 15, 2019) 2019 Del Ch Lexis 89, the court held that it had personal jurisdiction over a controlling shareholder based on a forum selection bylaw that made Delaware courts the exclusive forum for breach of fiduciary duty litigation. See §4.4.

In Avande, Inc. v Evans (Del Ch, Aug. 13, 2019, No. 2018-0203-AGB) 2019 Del Ch Lexis 305, *22, the court provided additional examples of bad faith conduct: “where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.” See §§4.10, 4.34. The Avande court also held that “[c]orporate waste occurs when a corporation is caused to effect a transaction on terms that no person of ordinary, sound business judgment could conclude represent a fair exchange.” See §4.72.

When there has been a systemic failure by the board to ensure that a reasonable information and reporting system exists, Delaware courts will find bad faith and a breach of the duty of care. In Marchand v Barnhill (Del 2019) 212 A3d 805, 809, the Delaware Supreme Court held that the facts of the case supported fair inferences that the company had established no reasonable compliance system or protocols, that as a result of the board’s lack of effort, the board did not receive official notices of food safety deficiencies, and that by failing to take remedial action, the company exposed consumers to listeria-infected ice cream, resulting in death and injury to company customers. See also In re Clovis Oncology, Inc. Derivative Litig. (Del Ch, Oct. 1, 2019, No. 2017-0222-JRS) 2019 Del Ch Lexis 1293 (board ignored reports that their flagship anti-cancer drug would not receive FDA approval; court emphasized that oversight system especially important in regulated industry). See §4.19.

In Personal Touch Holding Corp. v Glaubach (Del Ch, Feb. 25, 2019, No. 11199-CB) 2019 Del Ch Lexis 66, the court held that the corporate president breached his fiduciary duty of loyalty in several ways, including by usurpation of opportunity to acquire the building at issue and purchasing it himself. See §4.36.

In Morrison v Berry (Del 2018) 191 A3d 268, the Delaware Supreme Court set forth an expansive definition of materiality with respect to omitted information, as follows (191 A3d at 286):

Omitted information is material if there is a substantial likelihood that a reasonable stockholder would have considered the omitted information important when deciding whether to tender her shares or seek appraisal. This is any information that an investor would consider important. Such information could make a stockholder less likely to tender. But it also may be material if it is the sort of information that would make a stockholder more likely to tender, or just information that a reasonable stockholder would generally want to know in making the decision, regardless of whether it actually sways a stockholder one way or the other, as a single piece of information rarely drives a stockholder’s vote.

The Morrison court also emphasized that disclosures cannot be materially misleading and that “even a non-material fact can, in some instances, trigger an obligation to disclose additional, otherwise non-material facts in order to prevent the initial disclosure from materially misleading the stockholders.” 191 A3d at 283 (citation omitted). See §4.43.

In Kahn v M&F Worldwide Corp. (MFW) (Del 2014) 88 A3d 635, 644, a case involving a merger between a controlling stockholder and its corporate subsidiary, the Delaware Supreme Court held that the business judgment rule, rather than the entire fairness test, was the standard of review that should apply in circumstances where the merger was conditioned from the beginning on both (1) approval of an independent, adequately empowered special committee that fulfilled its duty of care and (2) the uncoerced, informed vote of a majority of the minority stockholders. The MFW test was followed in Olenik v Lodzinski (Del 2019) 208 A3d 704 (case remanded because it was not clear whether MFW conditions had been met), and Flood v Synutra Int’l, Inc. (Del 2018) 195 A3d 754 (business judgment rule applied, MFW conditions met). See §§4.44, 4.53.

On August 19, 2019, the Business Roundtable released a new Statement on the Purpose of a Corporation, signed by 181 chief executive officers of leading American companies, who have each committed to lead their companies for the benefit of all stakeholders, including customers, employees, suppliers, and communities as well as shareholders. See See §4.59.

In Corwin v KKR Fin. Holdings LLC (Del 2015) 125 A3d 304, the Delaware Supreme Court articulated an important limitation on the business judgment rule. Under the Corwin doctrine, the “business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” 125 A3d at 305. As the court in Morrison v Berry (Del 2018) 191 A3d 268, 274, explained (citations omitted):

The Corwin doctrine is premised on the view that, “[w]hen the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.” The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances. However, those same stockholders cannot possibly protect themselves when left to vote on an existential question in the life of a corporation based on materially incomplete or misleading information. Careful application of Corwin is important due to its potentially case-dispositive impacts.

See §4.65.

Fiduciary Duties in Family Business Transactions

 In Marriage of Ciprari (2019) 32 CA5th 83, 99, the court held that a husband’s choice to purchase publicly traded stocks and bonds with his separate property when community funds, which he also managed, were available was not an “appropriation of a corporate opportunity” because the investment opportunity was not “unique.” See §6.17.

Outside the marital context, the authority to transact business on behalf of a family member is governed by agency principles. To be bound to a transaction entered into by a family member, the family member to be bound (the principal) must have authorized, either expressly or by implication, the other family member (the agent) to enter into the transaction on the principal’s behalf. An agency relationship cannot be created by conduct of the agent alone; conduct by the principal is essential. Lopez v Bartlett Care Center, LLC (2019) 39 CA5th 311 (arbitration agreement signed by daughter was not binding on mother for lack of authority to execute agreement). See §6.49B.

Tracing may be achieved by either “direct tracing,” “exhaustion tracing,” or by an alternative method, depending on the facts of the case. Marriage of Ciprari (2019) 32 CA5th 83, 97 (“trial courts are free to consider and credit reasonable, well-supported, and nonspeculative expert testimony, when determining whether the proponent has successfully traced commingled assets to a separate property source”). See §6.54.

Duties of Investment Advisers and Broker-Dealers

An investment adviser’s fiduciary duty under the Investment Advisers Act of 1940 (Advisers Act) (15 USC §§80b–1—80b–21) is twofold: (1) a duty of care (see §7.25A), and (2) a duty of loyalty (see §7.25B). Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (July 12, 2019) (SEC Release No. 5248), 17 CFR pt 276, available at To carry out these duties, an investment adviser must adopt the principal’s goals, objectives, or ends, and, at all times, serve the client’s best interest and not subordinate the client’s interest to the adviser’s own. See §7.25.

The duty of care includes, among other things: (1) the duty to provide advice that is in the best interest of the client, (2) the duty to seek best execution of a client’s transactions when the investment adviser has the responsibility to select broker-dealers to execute client trades, and (3) the duty to provide advice and monitoring over the course of the relationship. Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (July 12, 2019) (SEC Release No. 5248), 17 CFR pt 276, available at See §7.25A.

The duty of loyalty requires that an investment adviser not place its own interest ahead of its client’s interest. Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (July 12, 2019) (SEC Release No. 5248), 17 CFR pt 276, available at; Amendments to Form ADV, Advisers Act Release No. 3060 (Oct. 12, 2010) (SEC Release No. 3060), 17 CFR pts 275 and 279, available at For example, an investment adviser cannot favor its own interests over those of a client, whether by favoring its own accounts or by favoring certain client accounts that pay higher fee rates to the investment adviser over other client accounts. See §7.25B.

In April and May 2018, the SEC released a package of proposed rulemakings relating to the standards for investment advisers and broker-dealers. In June 2019, those proposals were finalized and approved by the SEC. The proposals included a new Regulation Best Interest (Regulation Best Interest: The Broker-Dealer Standard of Conduct, Exchange Act Release No. 34-86031, 17 CFR Part 240 (Sept. 10, 2019), available at, consisting of a new short-form disclosure document that would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional (Form CRS Relationship Summary; Amendments to Form ADV, Exchange Act Release No. 34-86032, Advisers Act Release No. 5247, 17 CFR pts 200, 240, 249, 275, and 279 (Sept. 10, 2019), available at and an interpretation to reaffirm and, in some cases, clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients (Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (July 12, 2019) (SEC Release No. 5248), 17 CFR pt 276, available at, which is discussed in §§7.25–7.26. See §7.27.

Breach of Fiduciary Duty Litigation        

Although the most common element attacked by a defendant in a breach of fiduciary duty case is whether there is a fiduciary relationship, the other prima facie elements are necessary and can be the basis for successfully defending a claim. See, e.g., Tae Youn Shim v Lawler  (ND Cal, July 9, 2019, No. 17-cv-04920-EMC) 2019 US Dist Lexis 113935 (summary judgment granted for defendant because defendant did not show causation; i.e., how plaintiff was damaged by breach of fiduciary duty). See §8.4.

When a plaintiff alleges one of these traditional relationships that create a fiduciary relationship, the breach of fiduciary claim will most likely not be subject to attack at the pleading stage of a suit. See, e.g., The Depot, Inc. v Caring for Montanans, Inc. (9th Cir 2019) 915 F3d 643 (ERISA provides for two types of fiduciaries: a named fiduciary or a functional fiduciary); AlterG, Inc. v Boost Treadmills LLC (ND Cal 2019) 388 F Supp 3d 11330 (corporate officers’ fiduciary duty regarding protection of confidential information extends after officer leaves company); Marriage of Ciprari (2019) 32 CA5th 83, 101 (fiduciary relationship between spouses). See §8.6.

Under the Federal Arbitration Act (FAA) (9 USC §§1–16), the court will apply the same analysis to a breach of fiduciary duty claim as it would to any other claim in deciding whether to compel arbitration, namely, did the parties agree to arbitrate the dispute at issue? Munro v University of S. Cal. (9th Cir 2018) 896 F3d 1088, 1090 (arbitration denied because ERISA contract did not require arbitration of dispute at issue). See §8.22.

D & O Insurance

In Millennium Labs v Allied World Assur. Co., (U.S.) (9th Cir 2018) 726 Fed Appx 571, the court held that D&O policies only concern indemnity; defense costs are reimbursed by insurers only after they are incurred, and invoices are submitted to the carrier. See §§10.14, 10.53.

The materiality inquiry concerning misrepresentations in an insurance application is a subjective test viewed from the insurer’s perspective. Western World Ins. Co. v Professional Collection Consultants (9th Cir 2018) 721 Fed Appx 621 (insurer was entitled to rescission because federal investigation of company was not disclosed in application notwithstanding that application question was grammatically confusing). See §10.59.

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