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E-MailJennifer G. Hill is Professor of Corporate Law at University of Sydney Law School; Matthew Conaglen is Professor of Equity and Trusts at University of Sydney Law School. This post is based on a recent paper by Professors Hill and Conaglen, forthcoming in the Research Handbook on Fiduciary Law. This post is part of the Delaware law series; links to other posts in the series are available here.
Directors’ duties are a core element of corporate governance, yet a range of legal safe harbours ultimately shape the contours and stringency of these duties in practice. Although the standards of conduct that constitute directors’ duties (so-called “conduct rules”) are often relatively strict, legal safe harbours can dilute those rules, resulting in the application of more lenient standards of judicial review (“decision rules”). The potential gap between conduct rules and decision rules, which has been labelled “acoustic separation,” is particularly striking in the context of the duty of care as it is applied to directors.
Directors’ duties and legal safe harbours can also involve complex interaction between equitable and common law (‘general law’) principles on the one hand, and statutory regimes on the other. Whereas some jurisdictions, such as Delaware, rely exclusively on general law principles in relation to directors’ duties, others, including the United Kingdom and Australia, have adopted statutory regimes, which either co-exist with, or supplant, the general law regime.
In our recent paper, Directors’ Duties and Legal Safe Harbours: A Comparative Analysis, we explore, from a comparative law perspective, differences in the shape of directors’ duties and the legal safe harbours that accompany those duties. Our paper examines directors’ duties in the United States (focusing on Delaware law), the United Kingdom and Australia. We analyze the nature, operation and enforcement of directors’ duties in these three common law jurisdictions, with particular attention to the duty of care and two related legal safe harbours—the business judgment rule and exculpatory clauses.
The paper provides a comparative overview of directors’ duties in the three selected jurisdictions, using legal history as its starting point. It highlights the origins of directors’ fiduciary duties in the 1742 UK decision, Charitable Corp v Sutton (“Sutton’s case”), which measured the standard of care and diligence required by directors against the lowest standard available at that time—one of “gross neglect.”
In the United States, directors’ fiduciary duties constitute the flipside of Delaware statutory corporate law’s “cardinal precept” of centralized board power under §141(a) of the Delaware General Corporation Law. Yet, although this “cardinal precept” is set out in a statutory provision, directors’ fiduciary duties are themselves equitable. The modern Delaware judicial standard for breach of the duty of care, as shaped by the business judgment rule, is one of “gross negligence.” This is notionally the same as the 18th century standard in Sutton’s case, yet, in fact, the standard is far lower in practice, due to the operation of modern exculpatory charter clauses.
As our paper shows, the law relating to directors’ duties in the United Kingdom and Australia differs strikingly from Delaware law (and indeed from each other). These differences manifest themselves in a number of fundamental and intriguing ways.
First, in contrast to Delaware, where all duties owed by directors tend to be classified as “fiduciary” in nature, modern UK and Australian courts have departed from this approach, limiting the term “fiduciary” to “proscriptive” duties, which are peculiar to fiduciaries, and not owed by any other actors. Under this approach, the duty of care does not qualify as a “fiduciary” duty under Anglo-Australian law.
Secondly, there are fundamental differences in the contours of directors’ duties and the methods of avoiding breach. In contrast to Delaware, for example, the standard for breach of the duty of care under modern UK and Australian case law has risen considerably and is no longer one of “gross negligence.”
Thirdly, unlike Delaware corporate law, which relies on equitable directors’ duties, modern Anglo-Australian company law involves complex interaction between general law and statutory directors’ duties. Although the general law duties are very similar in the United Kingdom and Australia, the introduction of statutory directors’ duties has created divergence between these previously similar corporate law regimes.
Directors’ duties were codified for the first time in the United Kingdom under the Companies Act 2006. The statutory directors’ duties contained in this Act create an exclusive regime, supplanting the general law principles on which they are based. However, the Act also creates an intricate (and somewhat bizarre) relational looping between the general law and statutory duties—it stipulates that the statutory duties are to be “interpreted and applied in the same way as common law rules or equitable principles.”
In contrast to this UK model, Australia’s regime of statutory directors’ duties under the Corporations Act 2001 explicitly preserves the operation of directors’ duties at general law, although the contours of the general law and statutory duties are not necessarily the same.
Enforcement of statutory directors’ duties under Australia’s civil penalty regime also differs radically from enforcement in the United States and the United Kingdom, both of which rely primarily on private enforcement. Australia, on the other hand, has a primarily public enforcement regime, under which the regulator, the Australian Securities and Investments Commission (“ASIC”), is the main enforcement agent for breach of the statutory directors’ duties. These divergent regulatory choices have significant enforcement ramifications. In the United States and the United Kingdom, for example, there are virtually no contemporary examples of successful actions against public company directors for breach of the duty of care. The same is certainly not true in Australia. Recent case law has also accepted that the statutory duty of care is not only a private, but also a public, wrong, and that there is a public interest in the enforcement of directors’ duties in Australia.
Legal safe harbours create another level of complexity that may affect acoustic separation in relation to directors’ duties. They can alter the shape, scope and enforceability of duties and create a disjuncture between law on the books and law in practice. Our paper concludes by examining interesting differences between the United States, United Kingdom and Australia in the operation of two classic legal safe harbours—the business judgment rule and exculpatory clauses.
Ultimately, our paper provides a detailed examination, from a comparative perspective, of how differences in relation to directors’ duties and legal safe harbours can alter “acoustic separation,” by expanding or reducing the gap between conduct rules and decision rules. This issue has a direct bearing on the effectiveness of directors’ duties as a regulatory technique in the United States, the United Kingdom and Australia.
The full paper is available for download here.
