Pernicious Loyalty

Fiduciary loyalty is generally considered valuable, and in the usual case it is. Yet some of the very features of loyalty that make it valuable also encourage behaviors harmful to beneficiaries, third parties, or society as a whole. Examples include the corporate director whose concern with shareholder wealth maximization leads to considerable environmental harm and the skillful attorney whose zealous representation undermines justice between the parties. In short, actions that are motivated by good-faith fiduciary loyalty may be undesirable in individual cases. I will describe such cases as cases of pernicious loyalty. Outside the law, pernicious loyalty is often limited by features of extralegal loyalty itself. For example, the “alarm bells” that Philip Pettit describes as a trigger for moral reasoning may help constrain otherwise harmful loyalty between friends. Unfortunately, such responses do not always translate well to legal settings. This Article will consider the nature of pernicious loyalty together with potential legal responses to its excesses

Theories of the Firm and Judicial Uncertainty

There is no necessary connection between academics’ theories of the firm and judicial theories of the firm. Economists and legal scholars may adopt one theory of the firm, and courts may adopt another. We might even predict this result. Judges are not economists, and as increasingly sophisticated theories of the firm emerge in the academic literature, judges are not well-positioned to keep pace with the evolving accounts. Indeed, judges may reasonably choose to adopt no theory at all. Given these premises, this Essay explores the relationship between academically developed theories of the firm and corporate legal doctrine. Legal scholars who focus on theories of the firm often develop an interpretation of corporate law that endorses a particular legal theory of the firm. On these accounts, courts are thought to have adopted a commentator’s preferred theory (consciously or otherwise), with legal doctrine seen as a means of facilitating the formation and governance of firms with the desired features. There is another interpretation of corporate law worth considering, however. This Essay hypothesizes that much of corporate legal doctrine can be explained differently—not as the legal adoption of a particular theory of the firm, but rather as a response to judicial uncertainty regarding the correct theory of the firm. Theories of the firm still matter on this account— they motivate judicial reasoning—but they are not specifically adopted by corporate law