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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Violations of the law and the duty of loyalty

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Sometimes in the popular press or in the media (movies, television, etc) you will see discussions about how directors of the corporation might have a fiduciary obligation to pursue corporate profits even if to do so requires the corporation to adopt a policy of violating the law.  Nothing can be further from the truth.  Delaware courts, as well as other state courts, have repeatedly and unequivocally ruled that directors who adopt corporate policies to violate the law are not acting in the best interests of the corporation and are therefore disloyal directors.  

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Given that certificates of incorporation limit the purpose of the corporation for "any lawful purpose for which a corporation may be organized." If a corporate board pursues as a corporate policy activities which are illegal or contrary to a positive law, then such acts are also ultra vires, or outside the scope of permitted activities for corporate activity.

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In addition, directors are not exculpated from financial liability under §102(b)(7) for "acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law."  Consequently, a director who intentionally causes the firm to violate the law has violated their duty of good faith (i.e. loyalty) to the corporation and may be subject to financial liability. 

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TW Services v SWT Acquisition Corp

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Chancellor Allen described the duty of loyalty as requiring directors to endeavor to “manage the corporation within the law, with due care and in a way intended to maximize the long run interests of shareholders.”

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    TW Servs., Inc. v. SWT Acquisition Corp., C.A. Nos. 10427, 10298, 1989 WL 20290, at *7 (Del. Ch. Mar. 2, 1989)

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Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc.

Holding that if directors engaged in unlawful bribery for the purpose of helping the corporation obtain governmental permits, they had violated their “duty of loyalty” and further stating that “[u]nder Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity."

    Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 131, 163–64 (Del. Ch. 2004) 

 

Guttman v. Huang

"[O]ne cannot act loyally as a corporate director by causing the corporation to violate the positive laws it is obliged to obey.”

    Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003)

 

Miller v. Am. Tel. & Tel. Co.

“[D]irectors must be restrained from engaging in activities which are against public policy.”

    Miller v. Am. Tel. & Tel. Co., 507 F.2d 759, 762 (3d Cir. 1974)

 

Roth v. Robertson

“Where the directors and officers of a corporation engage in ultra vires transactions [illegal acts], and they cause loss to the corporation, they must be held jointly and severally liable for such damages.”

    Roth v. Robertson, 118 N.Y.S. 351, 353 (N.Y. Gen. Term 1909)

 

Desimone

“Directors “have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators.”

    Desimone, 924 A.2d at 934.