Director's duty not to consciously determine the company to break the law - reality or controversy?

Author:Adina Ponta Mihai B?descu
Position:Faculty of Law, Babe?-Bolyai University, Cluj-Napoca, Romania, ponta.adina@gmail.com.
Pages:16-36
SUMMARY

The paper at hand will analyze directors’ duty not to make decisions which determine corporate violations of positive legal norms and it will provide an interpretation of corporate governance practices that underpin this duty in pre-existing institutions. In the first part, we will pursue the doctrinal attempts of integrating the duty of compliance within the contents of the duty of care or duty... (see full summary)

 
FREE EXCERPT
Director's duty not to consciously determine the company
to break the law reality or controversy?
PhD student Adina PONTA1
Abstract
The paper at hand will ana lyze directors duty not to make decisions which determine
corpora te violations of positive legal norms and it will provide an interpr etation of corpora te
governance pr actices that underpin this duty in pre-existing institutions. In the first pa rt, we
will pursue the d octrinal attempts of integr ating the duty of compliance within the contents
of the duty of car e or duty of loyalty. We will follow the evolution of this duty, from a simple
effect of the ultr a vires doctrine, to an obstacle of the contr actual underlying of companies,
to an element of the duty of loyalty. The paper will review effects that corpora te lega l
violations have on agents liability, such as tax law, competition law, labor law, human rights
and environmental law breaches, a nd will illustrate other essentia l features of this duty, such
as compliance with cor porate governance codes, ethics and corpora te social responsibility.
Finally, we will demonstra te tha t regardless of the appr oach of good fa ith in cor porate
governance, as a distinct fiduciary duty or a s element of the duty of loyalty, the duty of
compliance is a pr erequisite of good faith and can be a ccomplished simultaneously with the
duty to maximize corpora te profit and shareholder s' wealth.
Keywords: duty of compliance, duty of ca re, duty of loyalty, good faith, dir ectors' lia bility,
transna tional justice
JEL Classification: K22
1. Introduction
One of the fundamental premises of corporate governance is directors’ duty
to make decisions with the purpose of advancing corporate interests, while paying
attention in the same time to the duty to maximize corporate profits and shareholders'
wealth2. As such, Business Law developed mechanisms to verify corporate agents’
conduct and achievement of the goals for which they have been appointed. In pursuit
of their ambition to achieve high performance in fulfilling the mandate and gain
additional bonuses, but also in fear of being replaced or sanctioned, members of the
governing bodies often opt for quick and effective methods to reach these goals,
neglecting the quality, morality, and sometimes even the legality of the chosen
means. The advocates of the theory by which a company is an entity build for the
purpose of increasing shareholders’ wealth, suggest that directors' purpose is to act
exclusively in the interest of shareholders and not of other market players, which
1 Adina Ponta - Faculty of Law, Babe-Bolyai University, Cluj-Napoca, Romania,
ponta.adina@gmail.com.
2 Eisenberg, M.A.: The duty of Good Faith in Corporate Law, Delaware Journal for Corporate Law no.
31, 2006, p. 5.
Juridical Tribune Volume 8, Issue 3, December 2018 625
justifies pursuing long-term profits without considering the consequences of their
actions for external natural and legal persons3. Fiduciary duties are designed to
regulate directors’ conduct and their decisions in situations of conflict of interest,
whereas currently, sufficient business law rules protect third party interests.
However, we observe a small number of regulations that encourage agents to act
with social responsibility.
An established principle as a prerequisite for complying with the (fiduciary
duty of) good faith is that directors are under a duty not to knowingly cause a
situation in which the corporation is in breach of the law, even if following a rational
judgment, the foreseeable consequence of the violation is maximization of
shareholders' dividends. The rationale for establishing this duty is that a corporation
in which individuals comply with statutory schemes simply because they fear legal
sanctions, cannot survive and in order to achieve the success of a corporation, most
of its members need to internalize the moral obligation to respect the law. This moral
duty includes the generally accepted standards of decency and honesty, and is not
limited to the duty to comply with legal norms4. Thus, it is irrelevant whether the
reasoning of the decision-maker was based on the fact that legal sanctions and
damage to the company's reputation are disproportionate to the probability of being
caught or whether the legal sanctions provided by law are lower than the estimated
profit obtained as a result of the violation.
The social interest to forbid directors to consciously cause a corporation to
break the law in search of profit growth, is becoming stronger. The present paper
aims at analyzing the fundamentals and traits of this duty, which is first and foremost
attached to corporate directors and officers, who guide the conduct and business
agreements concluded by the company. In the first part, I will analyze the
compatibility of the principle of lawful conduct with the principle of maximizing
shareholders’ wealth, namely the actual purpose for the founding and existence of a
company.
Further, I will offer an interpretation of the corporate governance practices
and rules which underpin this duty in various pre-existing institutions. A part of legal
literature considers that a director who determines a company to break applicable
law or discovers that the corporation doesn’t comply with legal provisions and
refrains from taking action to stop unlawful practices, violates the duty of loyalty5.
Other authors believe that directors have the duty to adopt and enforce rules and
procedures to ensure institutional compliance with regulations, therefore a director
who deliberately causes a corporation to violate the law, breaches the duty of care.
We will demonstrate that no mechanism for limiting liability can function
for acts or omissions committed without good faith, due to intentional improper
conduct or intentional violation of the law. The homogenous Delaware case law
3 Rosenberg, D: Dela ware's expanding duty of loyalty and illega l conduct: A step towards Corpor ate
Social Responsibility, Santa Clara Law Review vol. 52 no. 1, 2012, p. 82.
4 See f.n. 1, Eisenberg, p. 32 and f.n. 2 Rosenberg, p. 101.
5 Welch, E.P., Turezyn, A.J., Saunders, R.: Folk on the Delaware General Corporation Law: Fundamentals,
Wolters Kluwer Chicago, 2011 edition, p. 116.

To continue reading

REQUEST YOUR TRIAL