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Wisdom sometimes is best recognized by a traveler. In Delaware’s Fiduciary Imagination: Going-Privates and Lord Eldon’s Reprise, Professor David Kershaw of the London School of Economics revisits cases that we know very well, putting them in the context of British decisions, and elicits a distinction that appears obvious, yet comes as a bit of a surprise: There is a distinction between abuse of power and abuse of influence. These are two ideal types of the “source of obligation” for fiduciaries

Abuse of power flows from the grant of power to the fiduciary. Abuse of influence flows from the limited consent of the beneficiary. For example, controlling shareholders were once understood as being able to abuse their corporate powers. Today, it is more common to focus on how they can “threaten the minority to say ‘yes.’” Duties to creditors follow from influence over them near the debtor’s insolvency but do not flow from an abuse of corporate powers.

Abuse of power emerges from the fact that fiduciaries have power that stems from their undertaking. They “are clothed with power.” (quoting Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co., 16 Md. 456, 464 (1860)). What are the duties of being “entrusted” with power? A narrow answer is prohibition on various forms of self-dealing by trustees. A broader answer is to take as granted that fiduciaries have power and analyze “good faith” in the exercise of it.

Over the last half-century, according to Kershaw, a different source of obligation has emerged in courts: the “influence conception.” In this conception, the fiduciary relationship is that of principal and agent. It has a transactional base and the scope of the powers transferred is narrow. The fiduciary, moreover, has discretion to exercise a power only if its transfer is “truly voluntary.” It follows that any influence over the principal exercised by the fiduciary is suspect. Inquiries into whether there has been influence can become expansive, “subtle,” as is illustrated in decisions regarding special litigation committees and going private tender offers. The influence conception also allows for the expansion of the class of traditional doctrinal fiduciaries to include others who have influence, including parties to “confidential relations.” Furthermore, as the source of obligation has relational origins, individuals can be fiduciaries in some particularized matters, but not in related ones.

The influence conception of fiduciary obligations “has no limit” because “[e]verywhere … there are situations in which one person is in a position to detrimentally affect another.” Although judges limit it for pragmatic reasons, “the possibilities generated by the fiduciary influence conception will continue to serve the plaintiff bar … in generating a plethora of legal claims.” As we know, duties of loyalty and what constitutes informed consent can expand both extensively and intensively.

These two sources of obligation overlap. Kershaw documents cases in which the decision moves between the abuse of power and abuse of influence conceptions without comment. They can justify similar results. Despite accepting that fiduciaries have powers, particular exercises may be rejected because the fiduciary exercised “undue influence.” Determinations of undue influence can derive from both sources. Furthermore, the differences between them are minimized by understanding that the fiduciary has a very narrow remit. And good faith can be analyzed simply as a duty of loyalty.

A gap between the abuse of power on one side and undue influence on the other is the justified power of a fiduciary.

The two accounts are grounded in contrasting models of the fiduciary relationship. In the influence conception, serving a principal is to be servile. Fiduciaries only exercise justified power when they eschew being influential. The fiduciary of good character is a good listener. Fiduciaries in corporate law usually poorly fit this conception, as in fact they exercise rather unregulated corporate powers. Kershaw nicely depicts how this tension is a driver of today’s corporate law.

The abuse of power conception, on the other hand, is appropriate for powerful actors, the usual subjects of corporate law. Working as a fiduciary allows one powers that can be abused. The fiduciary of good character knows that their undertaking is not merely relational and has been shaped by both public and private forces. By this broad and open-ended remit, fiduciaries have been entrusted with moral, including political, authority. Louis D. Brandeis, for example, whose opinion in Southern Pacific Co. v. Bogert, 250 U.S. 483, 487-88, 491-92 (1919), states the abuse of power conception for corporate actors, practiced law as a powerful fiduciary, serving not client interests, but working as “counsel to the situation.”

Justifying fiduciaries’ exercises of power can depend on sympathetic understandings of their character, servile or moral as the case may be. Having public obligations, fiduciaries are neither free to totally disregard moral and political needs. But nor are they servants of the state. Human needs and democratically-determined goals compete with corporate loyalties. Fiduciaries make moral decisions by which they reveal themselves.

In thus reminding us of the source and nature of the power vested in corporate fiduciaries, Kershaw brings the character of the particular fiduciary back to the center of the description of corporate fiduciary relationships. The choice of which individuals become fiduciaries matters. Diversity, or the lack of it, may be highly consequential. Operating beyond beneficiaries’ consent, corporate fiduciaries’ characters influence their decisions and can become a subject of inquiry in contested actions.

This focus on character seems very old-fashioned. It is associated with a society that accepted inequality and unequal access to power. On the other hand, urgent needs may demand unconsented to exercises of power. ESG decisions, for example, may be better analyzed by inquiry into the morality of the fiduciary than into principal’s consent.

As in any excellent article, Professor Kershaw raises more questions than he can answer. He sets an agenda for inquiry into the modern relevance of the abuse of power conception of fiduciary obligations.

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Cite as: Robert Rosen, Bringing the Fiduciary Back In, JOTWELL (June 22, 2022) (reviewing David Kershaw, Delaware’s Fiduciary Imagination: Going-Privates and Lord Eldon’s Reprise, 98 Wash. L. Rev. 1669 (2021)), https://corp.jotwell.com/bringing-the-fiduciary-back-in/.