Reassessing Self-Dealing: Between No Conflict and Fairness

December 1, 2019

Scholars have long disagreed on which of two rules is more effective when a fiduciary engages in self-dealing. Some defend the “strict” no-conflict rule, which categorically bans self-dealing. Others prefer the “flexible” and “pragmatic” fairness rule, which allows self-dealing if it is fair to beneficiaries. The centrality of this debate cannot be overstated: corporate law as a field is fundamentally concerned with self-dealing by fiduciaries. Yet a lack of firm data means that this debate has dragged on for decades, with no end in sight.

This Article makes a simple but powerful point: the entire debate is somewhat misguided because, in operation, the difference between the two regimes is not as important as scholars generally assume. This is best seen by comparing the operation of the United Kingdom—which continues to employ the traditional no-conflict rule—with the United States, which adopted the fairness rule. The no-conflict and fairness rules share a common structure: they require strict loyalty but provide exceptions or cleansing devices that save fiduciaries from liability. Only the no-conflict rule allows companies to adopt their own exceptions. Based on this analysis, neither rule is self-evidently stricter or more pragmatic. In fact, examining the fiduciary rules in operation, including the exceptions that companies actually adopt and directors actually use, reveals that they are quite similar in operation. Both task neutral directors with policing directorial self-dealing.

This finding underscores the need for scholars and policymakers alike to focus not on the choice between no conflict and fairness but rather on the best use of exceptions or cleansing devices. The availability of proof of fairness as a cleansing device in the United States occasionally matters—but far less than commentators have claimed. It is often irrelevant because of its severity, rather than relevant because of its leniency. More attractive exceptions are usually available to self-dealing directors. This finding also complicates the dominant narrative holding that U.S. law significantly weakened as it evolved from no conflict to fairness; far from rejecting a stricter U.K. law, U.S. law came more closely to resemble U.K. law in operation.

December 2019

No. 3