Privately Ordered Fiduciaries

Megan Wischmeier Shaner
Volume 28
,  Issue 1


In corporate law there exists a disconnect between the outsized role officers play in managing the corporation and the scant attention officers receive in corporate doctrine. Corporate officers, particularly at public corporations, occupy a central role in the economy and in our society more broadly. Executive officers have control over “vast aggregations of wealth, of which they may own very little.”1Megan Wischmeier Shaner, Stockholder Litigation, Fiduciary Duties, and the Officer Dilemma, in Research Handbook on Representative Shareholder Litigation 330 (Sean Griffith et al. eds., 2018); see Myron T. Steele, The Moral Underpinnings of Delaware’s Modern Corporate Fiduciary Duties, 26 Notre Dame J.L. Ethics & Pub. Pol’y 3, 9 (2012); Lynn A. Stout, On the Proper Motives of Corporate Directors (Or, Why You Don’t Want to Invite Homo Economicus to Join Your Board), 28 Del. J. Corp. L. 1, 2–3 (2003). One example where officer decision-making has an outsized impact is merger and acquisition (“M&A”) activity. M&A activity has profound consequences for stockholders and a company writ large, the most extreme example being mergers that effect a sale of the company and result in stockholders cashing out. It is widely recognized that the chief executive officer (“CEO”) and other senior executive officers are the driving forces in this process—with M&A deals “done at the behest of executives, who also largely run the deal-making process.” Afra Afsharipour, Bias, Identity and M&A, 2020 Wis. L. Rev. 471, 471; see also id. at 474 (“CEO domination is particularly acute in the M&A context.”). Moreover, they are afforded great deference in how they manage corporate assets. As the well-documented succession of corporate mismanagement and fraud that has occurred over the past three decades revealed, the decision-making of members of the C-Suite has profound consequences not only for the individual firm for which they work but also for the economy and markets worldwide.2See Report of the Task Force of the ABA Section of Business Law Corporate Governance Committee on Delineation of Governance Roles and Responsibilities, 65 Bus. Law. 107, 145–46 (2009) [hereinafter ABA Report] (“Renewed concern that our society is deeply dependent on the continued health and viability of corporations for economic growth has heightened the scrutiny of current corporate governance practices.”). In the 2001 accounting scandals and the 2007 financial crisis, widespread officer malfeasance was uncovered and found to contribute to the economic fallout that ensued. See Lynne L. Dallas, Short-Termism, the Financial Crisis, and Corporate Governance, 37 J. Corp. L. 265, 281–93 (2012); Robert W. Hamilton, The Crisis in Corporate Governance: 2002 Style, 40 Hous. L. Rev. 1, 17–19 (2003); Usha Rodrigues, From Loyalty to Conflict: Addressing Fiduciary Duty at the Officer Level, 61 Fla. L. Rev. 1, 3 (2009); Megan W. Shaner, The (Un)Enforcement of Corporate Officers’ Duties, 48 U.C. Davis L. Rev. 271, 290–93 (2014).

The modern corporate officer’s power and influence extends beyond the economic. Undisputedly, senior executive officers, like the chief executive officer (“CEO”), wield enormous power, occupying “recognized positions of immense economic and social influence” and drawing “widespread attention in the larger cultural arena.”3Lyman Johnson & Dennis Garvis, Are Corporate Officers Advised About Fiduciary Duties?, 64 Bus. Law. 1105, 1106 (2009); see The New Aristocrats of Power, The Economist (Feb. 21, 2019), (“Chief executives are today’s aristocracy.”); What It Takes to Be a CEO in the 2020s, The Economist (Feb. 6, 2020), Prominent CEOs Warren Buffett, Mark Benioff, Jeff Bezos, Marissa Mayer, Elon Musk, and Tim Cook, for example, are household names, dominating the news cycle and social media platforms. Using their corporate power and status, these individuals are often viewed as leaders on political and social issues like climate change, minimum wage, healthcare, and education. Today’s executive officers play a leading role in setting the economic, social, and moral agendas of corporations, markets, and society more broadly.4See What It Takes to Be a CEO in the 2020s, supra note 3.

Given the central role that officers play in the economy and society, accountability is vital to instilling confidence in the corporation as an institution. Imposing fiduciary duties on management has been cited as a central way to hold managers accountable.5See Lyman P.Q. Johnson & Robert V. Ricca, (Not) Advising Corporate Officers About Fiduciary Duties, 42 Wake Forest L. Rev. 663, 687 (2007); Mark Lebovitch & Jeroen van Kwawegen, Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims, 40 Del. J. Corp. L. 491, 500–01 (2016); Megan Wischmeier Shaner, The “Director Preference” in Stockholder Litigation, 39 U. Haw. L. Rev. 75, 76 (2016); Shaner, supra note 2, at 279. Historically, however, corporate doctrine has devoted limited attention to prescribing the role and legal principles governing officers. As the officer rose to prominence in the twentieth century, corporate law largely remained silent.6See Kelli A. Alces, Beyond the Board of Directors, 46 Wake Forest L. Rev. 783, 788–89 (2011) (explaining the shift in power to officers: “once an increasing number of firms failed to have a controlling shareholder in place, [then] the CEO was able to run the daily operations of the firm and could handpick nominees to the board. The result of that change was that the board was effectively inferior to the CEO it was supposed to supervise.”). Even today, following notable scandals largely attributable to the actions of executive officers,7See James D. Cox & Thomas Lee Hazen, Corporations 145 (2d ed. 2003) (“Enron, WorldCom, and no fewer than a dozen other large public companies shocked the public conscience, not because they failed, but because of the revelations of extensive reporting frauds, overreaching, and wasteful misbehavior by their most senior executives.”); Am. Bar Ass’n Task Force on Corp. Resp., Preliminary Report of the American Bar Association Task Force on Corporate Responsibility, 58 Bus. Law. 189, 190 (2002) (“[Enron] is merely one of the most notorious in a disturbing series of recent lapses at large corporations involving false or misleading financial statements and alleged misconduct by executive officers.”); James D. Cox, Private Litigation and the Deterrence of Corporate Misconduct, 60 L. & Contemp. Probs. 1, 11 (1997) (“[T]here is hardly any behavior within the corporate setting that cannot be linked to advancing a manager’s self interest.”); Lyman P.Q. Johnson & David Millon, Recalling Why Corporate Officers Are Fiduciaries, 46 Wm. & Mary L. Rev. 1597, 1599–602 (2005) (pointing out that leading up to the financial scandals in 2001–2002, “[c]orporate interests were left unprotected as officers operated free of any meaningful director supervision”); Shaner, supra note 2, at 292 (“Similar to Enron and stock option backdating, breakdowns in corporate governance, including the officer-dominated model of corporate management and officer malfeasance, were cited as a cause (although not the only cause) of the crisis.”); Marcy Gordon, Is Backdating the New Corporate Scandal?, Law.Com Corp. Couns. (June 5, 2006, 12:00 AM), (describing the actions resulting in option backdating as “cheating the corporation in order to give the CEO more money than was authorized” and “the greed of executives”). these individuals remain the most undertheorized participant in the corporate endeavor.

Over the past two decades, legal and practical hurdles to developing doctrine addressing the corporate officer have been cleared away. In 2004, the Delaware Code was amended to provide for personal jurisdiction over nonresident officers of Delaware corporations.8See Del. Code Ann. tit. 10, § 3114 (2020). Before 2004, the Delaware courts only had personal jurisdiction over nonresident directors of Delaware corporations, so individuals acting in their officer capacity were not, without more, subject to the reach of the courts. See S.B. 126, 142d Gen. Assemb., 74 Del. Laws, ch. 83 (2003); S.B. 341, 129th Gen. Assemb., 61 Del. Laws, ch. 119 § 1 (1977); Gebelein v. Perma-Dry Waterproofing Co., No 6210, 1982 WL 8776, at *2–3 (Del. Ch. Jan. 12, 1982) (holding that the court did not have personal jurisdiction over nonresident, nondirector officers by reason of their officer status alone); Kelly v. McKesson HBOC, Inc., No. Civ.A. 99C-09-265WCC, 2002 WL 88939, at *16–17 (Del. Super. Ct. Jan. 17, 2002) (finding that the court did not have personal jurisdiction over the nonresident executive vice president and chief financial officer of a Delaware corporation); Eric A. Chiappinelli, The Myth of Director Consent: After Shaffer, Beyond Nicastro, 37 Del. J. Corp. L. 783, 798 (2013); Eric A. Chiappinelli, The Underappreciated Importance of Personal Jurisdiction in Delaware’s Success, 63 DePaul L. Rev. 911, 955–57 (2014); Jack B. Jacobs, Personal Jurisdiction Over Corporate Officers and Directors: Recent Developments, 4 Del. J. Corp. L. 690, 694–95 (1979); Verity Winship, Jurisdiction Over Corporate Officers and the Incoherence of Implied Consent, 2013 U. Ill. L. Rev. 1171, 1178, 1207. “Around this same time there was a dramatic shift underway in corporate governance norms that had been buttressed by federal regulation to create greater board independence from officers.”9Shaner, supra note 1, at 339; see Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 1950-2005: Of Shareholder Value and Stock Market Prices, 59 Stan. L. Rev. 1465, 1472–75 (2007) (estimating that the percentage of inside directors at public corporations decreased from fifty percent in 1950 to approximately fifteen percent in 2005, with independent directors having increased their board representation from twenty percent to seventy-five percent over the same time period); id. at 1468 (finding that the trend in greater director independence began before the enactment of the NYSE, NASDAQ, and Sarbanes–Oxley requirements, indicating a shift in best practices and corporate culture towards greater independence before it was legally required); Marcel Kahan & Edward Rock, Embattled CEOs, 88 Tex. L. Rev. 987, 1024–25 (2010) (observing that the number of employee directors at S&P 500 corporations declined from about 2.1 in 2000 to 1.5 in 2007); Urska Velikonja, The Political Economy of Board Independence, 92 N.C. L. Rev. 855, 857 (2014). With fewer board seats occupied by company executives, officer conduct was no longer reliably regulated by bootstrapping obligations to an officer’s concurrent director status,10See William B. Chandler III & Leo E. Strine, Jr., The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. Pa. L. Rev. 953, 1002–03 (2003) (“As a practical matter, however, most of our case law has focused on the fiduciary duties of corporate directors because boards have tended to include those key executives in a position to extract private rents from the firm at the expense of the stockholders.”). underscoring the need for specific rules addressing officer obligations.

The separation of director and officer status in public corporations led to a heightened focus on officers as distinct legal actors in the corporation and on the accompanying legal standards that would govern them. The Delaware Supreme Court’s 2009 decision in Gantler v. Stephens11965 A.2d 695 (Del. 2009). clarified, in part, the fiduciary obligations and accountability of corporate officers.12Id. at 710–11. In Gantler, the court held that “officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.”13Id. at 708–09. Post-Gantler, Delaware Court of Chancery decisions have done little in the way of further developing officer fiduciary duty doctrine. See, e.g., Hampshire Grp., Ltd. v. Kuttner, C.A. No. 3607-VCS, 2010 WL 2739995, at *11 & n.75 (Del. Ch. July 12, 2010) (citing to Gantler for fiduciary duty discussion); ZRII, LLC v. Wellness Acquisition Grp., Inc., C.A. No. 4374-VCP, 2009 WL 2998169, at *11 & n.117 (Del. Ch. Sept. 21, 2009) (same). Furthermore, the court’s decision in Gantler has been critiqued as leaving unresolved many issues regarding the exact scope of an officer’s fiduciary duties (e.g., whether the standard of the duty of care for officers is negligence or gross negligence, whether the business judgment rule applies to officer decision-making, and the extent of officer liability). See Johnson & Garvis, supra note 3, at 1108 (discussing the outstanding issues following Gantler and stating that “[c]learly, the area of officer duties remains murkier than that of director duties”); J. Travis Laster & Steven M. Haas, Delaware Supreme Court Establishes Clear Rules in Gantler Decision, Insights, Mar. 2009, at 2, 8 (noting the issues that remain after Gantler); Megan Wischmeier Shaner, Restoring the Balance of Power in Corporate Management: Enforcing an Officer’s Duty of Obedience, 66 Bus. Law. 27, 37–38 (2010) (“Even post-Gantler, the nature and scope of a corporate officer’s fiduciary duties and liabilities are, in some minds, just as unsettled as the Guth court left them.”); see also R. Franklin Balotti & Megan W. Shaner, Safe Harbor for Officer Reliance: Comparing the Approaches of the Model Business Corporation Act and Delaware’s General Corporation Law, 74 Law & Contemp. Probs. 161, 167–72 (2011) (discussing whether the protections of section 141(e) of the Delaware Code apply to officers). These developments in corporate law, individually and collectively, cleared a path for the exploration and development of the legal contours of officer duties.14See Jack B. Jacobs, The Delaware Supreme Court: Looking to the Future, M&A Law., June 2004, at 1, 5 (predicting that the amendment to Delaware’s personal jurisdiction statute would “enable Delaware courts over time to develop a jurisprudence of corporate officer fiduciary duty across a broad spectrum of activities in which public corporations commonly engage”); Shaner, supra note 1, at 337–38 (discussing the barriers to officer fiduciary duty litigation). The courts, stockholders, and their counsel, however, have declined the invitation to tackle officer accountability and responsibility.15See Megan Wischmeier Shaner, Officer Accountability, 32 Ga. St. U. L. Rev. 357, 370–71, 379 (2016) (finding no noticeable impact on officer fiduciary case law post-Gantler). And somewhat ironically, when faced with the few officer challenges that have been brought before them, the Delaware courts have applied a director-centric lens in evaluating officer issues, narrowing the potential avenues for legal challenges, closing the door on future doctrinal development, and limiting the guidance available to market actors.16See, e.g., Gorman v. Salamone, C.A. No. 10183-VCN, 2015 WL 4719681, at *5 (Del. Ch. July 31, 2015) (holding that section 142 did not allow stockholders to remove officers through authority conferred by a bylaw and that such authority was reserved for the board). As described by Professor Lyman Johnson, “we don’t legally ‘see’ the officer aspect of Delaware law because our observation is clouded by the more conspicuous director-primacy aspect of Delaware law that stands in the forefront.” Lyman Johnson, Dominance by Inaction: Delaware’s Long Silence on Corporate Officers, in Can Delaware Be Dethroned?: Evaluating Delaware’s Dominance of Corporate Law 182, 193 (Stephen M. Bainbridge et al. eds., 2018).

The absence of officer doctrine has not gone unnoticed. Academics, jurists, corporate managers, and their counsel have all commented on the ambiguity that exists with respect to the legal rules governing officer decision-making and liability.17See Chandler & Strine, supra note 10, at 1002–03; see also Kuttner, 2010 WL 2739995, at *11 (“There are important and interesting questions about the extent to which officers and employees should be more or less exposed to liability for breach of fiduciary duty than corporate directors. The parties in this case have not delved into any of those issues, and I see no justifiable reason for me to do so myself.”); Shaner, supra note 13, at 31–36 (describing the lack of focus on officer fiduciary duties in Delaware case law). In fall 2018, the Officer Liability Task Force (the “Task Force”) of the American Bar Association (“ABA”) met for the first time to discuss: (1) the uncertainty in the law surrounding the nature and scope of the fiduciary duties of, and applicability of the business judgment rule to, corporate officers; and (2) potential ways to address that uncertainty, including whether any potential products, such as annotated model employment agreements, would assist in providing additional clarity.18See Notice of ABA Business Law Section Annual Meeting, Officer Liability Task Force (Sept. 7, 2018) [hereinafter Task Force Notice] (on file with Author). The Task Force’s objectives are, however, relatively narrow:

This Task Force is focused on a specific objective: to evaluate the development of tools that may be used to bring greater certainty to corporations, boards and officers about officers’ duties and relationship to the board and corporation overall . . . the Task Force will attempt to develop means by which corporations may address these issues within the confines of current positive law.19Task Force of the Dirs. & Officers Liab. Subcomm., Officers, Fiduciary Duties and the Business Judgment Rule 7 (ABA Bus. Section, Working Paper 2020) [hereinafter Task Force Working Paper] (on file with Author).

Accordingly, the Task Force is exploring the viability of private ordering solutions (i.e., structuring officer obligations and liabilities through firm-specific contractual agreements).20See id. at 8. For purposes of this Article, the term “private ordering” is intended to mean mechanisms that are contractual in nature. See Jill E. Fisch, The New Governance and the Challenge of Litigation Bylaws, 81 Brook. L. Rev. 1637, 1638 (2016) (“[F]or the most part the innovations take the form of private ordering—that is, the adoption of issuer-specific rules that are contractual in nature (as opposed to statutes, agency rules, or decisional law).”); D. Gordon Smith, Matthew Wright & Marcus Kai Hintze, Private Ordering with Shareholder Bylaws, 80 Fordham L. Rev. 125, 127 n.12 (2011).

In setting out its objectives and agenda, the Task Force cautions that it “will not wade into the debate regarding the precise nature of officers’ fiduciary duties, nor the wisdom of applying the business judgment rule to officers.”21Task Force Working Paper, supra note 19, at 7. Private ordering in the corporate space is, however, inextricably intertwined with these (and other) broader normative questions. While framed as a modest proposal, the Task Force would extend private ordering of corporate governance in a radical new direction, taking aim at bedrock principles of corporate law—fiduciary duties and the business judgment rule.22Id. at 7, 9. Prior case law has endorsed the idea that stockholders’ rights may be contractually structured.23See ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 558 (Del. 2014) (en banc); Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 939 (Del. Ch. 2013); James D. Cox, Corporate Law and the Limits of Private Ordering, 93 Wash. U. L. Rev. 257, 258 (2015). The Task Force’s project extends this view, raising the issue of whether stockholder protections (i.e., fiduciary duties) may also be subject to contract.

This Article tackles the broader issues raised by the Task Force’s work, taking a deep dive into the issue of private ordering of corporate officer fiduciary obligations and liability. Specifically, this Article addresses questions like: Should officer duties be a product of contract or common law? What is the foundational basis for officer fiduciary obligations? What are (or should be) the bounds, if any, for private ordering of this nature? How does officer private ordering fit within the broader scheme of privately ordered fiduciaries across business organizations? What are possible ways to structure the private ordering of officer duties, in particular the business judgment rule?

This Article’s goal is twofold: to examine the issues surrounding privately ordered officer duties, first from a pragmatic angle and then from a normative angle. Part I reviews the emergence of private ordering in the corporate sphere, highlighting the aims and efforts of the ABA Task Force. Then, Part II examines limits to the effectiveness and enforceability of private ordering of corporate officers. Part III follows by evaluating the legal viability and contractual considerations of private ordering of: (1) officer fiduciary duties; and (2) business judgment rule application. Part III also discusses drafting considerations that are likely to arise as corporate actors and their counsel undertake private ordering of officer obligations. Finally, Part IV discusses the broader normative implications for corporate law if officer fiduciary duties and liabilities become dominated by private ordering. Notably, this Article concludes that private ordering, though seemingly an attractive way to more clearly define corporate officer obligations, ultimately may weaken stockholder rights, complicate the courts’ role in enforcement, and marginalize market norms in ways that muddle the very subject—the duties and liabilities of corporate officers—that it seeks to clarify.

I.     The Call for Private Ordering Solutions

Private ordering is not a novel phenomenon in corporate law. Classic examples of privately ordered corporate measures include poison pills, staggered board provisions, majority voting bylaws, and advance notice bylaws.24See James D. Cox & Randall S. Thomas, Delaware’s Retreat: Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate Law, 42 Del. J. Corp. L. 323, 367 (2018); Zohar Goshen & Sharon Hannes, The Death of Corporate Law, 94 N.Y.U. L. Rev. 263, 267 (2019). More recently, corporate contracting has taken the form of forum selection bylaws, fee shifting provisions, minimum stake requirements, appraisal waivers, limitations on books and records inspection rights, and arbitration provisions.25See Ann M. Lipton, Limiting Litigation Through Corporate Governance Documents, in Research Handbook on Representative Shareholder Litigation 176–77 (Sean Griffith et al. eds., 2018); Megan Wischmeier Shaner, Interpreting Organizational “Contracts” and the Private Ordering of Public Company Governance, 60 Wm. & Mary L. Rev. 985, 1002–05 (2019); Gabriel Rauterberg, The Separation of Voting and Control: The Role of Contract in Corporate Governance 10 (Mich. L. Sch., Working Paper, 2020), The few judicial decisions and statutory amendments limiting the bounds of corporate contracting have not slowed the private ordering movement. Attempts at using contracts to shape key aspects of corporate governance and to shift the distribution of rights and power in the corporation continue apace,26See George S. Geis, Ex-Ante Corporate Governance, 41 J. Corp. L. 609, 610 (2016) (“Increasingly, however, shareholders and managers are emphasizing tactics that move from ex-post response to ex-ante planning.”); Hon. Henry duPont Ridgely, The Emerging Role of Bylaws in Corporate Governance, 68 SMU L. Rev. 317, 330 (2015) (discussing the emerging role of bylaws as a corporate governance tool); Verity Winship, Shareholder Litigation by Contract, 96 B.U. L. Rev. 485, 521–22 (2016) (describing corporate contract procedure as an emerging distinctive legal phenomenon). Illustrating the emergence of private ordering in organizational documents, in 2015, proxy advisory firms ISS and Glass Lewis included charter and bylaw provisions that impacted litigation rights as a separate category in their voting guidance to investors. See Glass, Lewis & Co., LLC, Proxy Paper Guidelines 2015 Proxy Season: An Overview of the Glass Lewis Approach to Proxy Advice 39–40 (2015),; ISS, United States Summary Proxy Voting Guidelines: 2015 Benchmark Policy Recommendations 24 (2014), (“Generally vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits . . . .”). including the recent efforts of the ABA Task Force.

To date, the Delaware courts have largely supported and endorsed corporations’ power to arrange their affairs through private ordering in organizational documents.27See Salzberg v. Sciabacucchi, 227 A.3d 102, 137 (Del. 2020) (en banc) (“Our law strives to enhance flexibility in order to engage in private ordering, and to defer to case-by-case law development.”); Cox, supra note 23, at 258 (“Boilermakers and ATP Tour each reasoned from the perspective that the shareholders’ relationship with the corporation, and in turn their relationship with the board of directors, are contractual so that much of the shareholders’ rights can be understood to flow from certain organic documents, and most significantly and pervasively from the company’s bylaws.”). The enabling nature of the Delaware General Corporation Law (“DGCL”) contemplates a large amount of leeway in crafting corporate charters and bylaws.28See Salzberg, 227 A.3d at 116 (“[T]he DGCL allows immense freedom for businesses to adopt the most appropriate terms for the organization, finance, and governance of their enterprise.”); Williams v. Geier, 671 A.2d 1368, 1381 (Del. 1996) (en banc) (“At its core, the Delaware General Corporation Law is a broad enabling act which leaves latitude for substantial private ordering, provided the statutory parameters and judicially imposed principles of fiduciary duty are honored.”); Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 117 (Del. 1952) (“[Section 102(b)(1) of the DGCL] confers, in the most general language, the right to include in a certificate of incorporation any provision deemed appropriate for the conduct of the corporate affairs.”); see also Del. Code Ann. tit. 8, § 109(b) (2020) (“The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” (emphasis added)). Indeed, the contract metaphor that pervades corporate law is frequently cited as the basis for allowing private ordering in these organizational documents.29The Delaware courts describe the combination of the certificate of incorporation, bylaws, and applicable state statutes as a “flexible contract” (1) between the State and the corporation, (2) between the corporation and its stockholders, and (3) among the stockholders. See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 939, 952, 957 (Del. Ch. 2013); see also Blackrock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd., 224 A.3d 964, 977 (Del. 2020) (“Because corporate charters and bylaws are contracts, our rules of contract interpretation apply.” (quoting Hill Int’l, Inc. v. Opportunity Partners L.P., 119 A.3d 30, 38 (Del. 2015))); Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010) (en banc). For a discussion of whether LLC operating agreements are common law contracts, see Joan MacLeod Heminway, The Ties That Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811, 820, 828 (2015). As the Delaware courts reiterate and reinforce the idea that charters and bylaws are contracts, corporate actors become more confident that private ordering amendments will be upheld, triggering further developments and proposals to include corporate governance features in organizational documents.30See Geis, supra note 26, at 645 (“One clear driver of these initiatives is a renewed emphasis on corporate bylaws as contracts. By conceptualizing the corporate relationship as an unfolding agreement between shareholders and firms, lawmakers can view bylaw modification efforts as the permissible product of flexible private ordering.”).

Outside of a corporation’s organizational documents, private ordering through other devices, like stockholder agreements, has been on the rise.31For analyses of the increasing use and validity of stockholder agreements as a means of corporate governance private ordering, see Rauterberg, supra note 25, at 4–5 (describing the migration and increased use of stockholder agreements from smaller, privately-held corporations, into larger corporations and public companies); Jill E. Fisch, Private Ordering and the Role of Shareholder Agreements 4, 6, 23 (Aug. 2, 2020) (unpublished manuscript) (on file with University of Pennsylvania Carey Law School Legal Scholarship Repository), Though often viewed through a different legal lens than private ordering set forth in organizational documents, attempts to restructure the rights and balance of power within a corporation using stockholder agreements have similarly been upheld by the courts.32See, e.g., Manti Holdings, LLC V. Authentix Acquisition Co., No. 2017-0887-SG, 2018 WL 4698255, at *5 (Del. Ch. Oct. 1, 2018) (holding stockholders were bound by their wavier of appraisal rights in a stockholder agreement); Kortüm v. Webasto Sunroofs Inc., 769 A.2d 113, 125 (Del. Ch. 2000) (suggesting that stockholder agreements could limit books and records inspection rights). Although receiving less judicial attention than charter and bylaw amendments, stockholder agreements are poised to play a central role in private ordering’s future.33See Fisch, supra note 31 (manuscript at 4) (discussing the expansive private ordering trend in stockholder agreements).

Embracing the private ordering movement, the ABA Task Force seeks to use contractual means to bring certainty to a long-neglected area of the law—the nature and scope of officer fiduciary duties and the applicability of the business judgment rule to officer actions. For over eight decades the Delaware courts have refrained from expounding on corporate officers’ fiduciary obligations.34See Lyman Johnson, The Three Fiduciaries of Delaware Corporate Law – and Eisenberg’s Error, in Fiduciary Obligations in Business (A. Laby & J. Russell eds., forthcoming 2020) (manuscript at 5), (“Yet, Delaware’s law of officer duties is sparse. The undeveloped state of the law, moreover, has endured for the many decades Delaware has dominated corporate law.”); Shaner, supra note 13, at 29; Shaner, supra note 1, at 335; Shaner, supra note 2, at 297–98. Professor Johnson points out that Delaware’s silence on officer issues has served Delaware well. By not having to articulate legal rules that some might regard as too lax and others as too severe – thus achieving a desirable Goldilocks effect – but instead saying very little at all, Delaware judges were able to allow the subject of officer misconduct to be addressed in other ways, thereby escaping the fierce criticism they periodically have faced for certain controversial rulings on directors. Johnson, supra note 16, at 183–84. In the absence of judicial guidance, corporations and their counsel have been pushed to seek private means of providing greater certainty.35See Johnson, supra note 16, at 183–84; Shaner, supra note 1, at 342–43 (discussing stockholders’ attempts to use tools other than litigation to hold officers accountable). With no indication of forthcoming clarity from the courts or legislature, the Task Force’s objective is to evaluate the possibilities for private ordering in this space.36Task Force Notice, supra note 18; Task Force Working Paper, supra note 19, at 11–12. In particular, the Task Force is focused on developing potential products such as model employment agreements, bylaw provisions, or charter provisions to address some of the outstanding legal issues surrounding corporate officers.37Task Force Notice, supra note 18; Task Force Working Paper, supra note 19, at 12.

The Task Force’s project differs from the private ordering movement to date in several respects. First, the ABA, and not a private actor, is the proponent of private ordering for corporate officers.38In addition, the Task Force seeks to produce a model provision before a court rules on the validity of such contracting; other model provisions have come after judicial guidance on the validity of such mechanisms. See Task Force Working Paper, supra note 19, at 2, 11–12. Second, and relatedly, the impetus for the Task Force’s corporate contracting effort can be characterized as addressing a void in the law rather than as an effort to engage in firm-specific restructuring of corporate governance mechanisms. Thus, concerns raised about boards’ and stockholders’ use (or abuse) of private ordering in an attempt to skew the balance of corporate power are not as salient for the Task Force’s recommendations as they have been for the development of prior ex ante governance measures.39See Shaner, supra note 25, at 992, 996–97 (describing the push and pull between boards and stockholders in trying to shape corporate governance through private ordering in organizational contracts). Of course, as private actors seek to adapt and adopt the Task Force’s model provisions, these concerns will be relevant.

Third, the Task Force’s proposal extends private ordering from procedure-oriented matters to substantive corporate law. Recent private ordering efforts have focused on limiting or channeling stockholders’ right to sue through creating different “procedural preconditions on shareholders’ ability to bring litigation.”40Lipton, supra note 25, at 176–77. Similarly, private ordering in stockholder agreements has focused on individual stockholder rights as opposed to structural changes to the corporation. See Fisch, supra note 31, at 20–21. In contrast, fiduciary obligations and the business judgment rule, which are the focus of the Task Force, are considered “bedrock principles” of corporate jurisprudence.41See In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 126 (Del. Ch. 2009). The Task Force’s proposal signals a shift in corporate contracting from procedural aspects of instituting and maintaining litigation to shaping the substantive rights and duties underlying the legal dispute.42See Cox, supra note 23, at 258 (“[C]an the board of directors’ authority to amend the bylaws extend to changing both the procedural and substantive relationship that shareholders have with the corporation and the board of directors?”). Stated another way, prior private ordering focused on stockholders’ exercise (or waiver) of their rights, whereas the Task Force’s project addresses doctrinal stockholder protections. The Task Force’s proposal thus moves private ordering to a domain of substantive law that has largely been untouched. As a result, the Task Force’s work raises important questions regarding the permissible scope of private ordering in the corporation. In considering how such contracting would be structured, the Task Force’s project also exposes the complexities and uncertainties that underlie officer fiduciary doctrine.

II.    The Limits of Private Ordering

The rise in private ordering raises the question: Should there be a limit to a corporation’s ability to structure itself through contracts? And if so, what is that limit? This Part addresses those questions by examining the judicial, statutory, and intrinsic limits on private ordering of corporations, ultimately underscoring the importance of the unique nature of corporations and the integrity of the relationship between corporate parties in defining those limits.

Scholars have put forth a variety of proposals for limiting a corporation’s power to arrange its affairs through contract. Such proposals typically focus on applying more exacting judicial scrutiny or requiring more robust stockholder consent.43See id. at 258; Jill E. Fisch, Governance by Contract: The Implications for Corporate Bylaws, 106 Calif. L. Rev. 373, 377 (2018). For discussions regarding the proper framework for delineating enforceable private ordering in governing documents, see Albert H. Choi & Geeyoung Min, Contractarian Theory and Unilateral Bylaw Amendments, 104 Iowa L. Rev. 1, 9–10 (2018); Geis, supra note 26, at 640; Lipton, supra note 25, at 177–81; Winship, supra note 26, at 526, 528. Absent specific statutory prohibition, however, courts have largely upheld and endorsed private ordering.44See, e.g., Salzberg v. Sciabacucchi, 227 A.3d 102, 116 (Del. 2020) (en banc); see also Del. Code Ann. tit. 8, § 102(f) (prohibiting fee shifting provisions). As the Delaware Supreme Court pointed out in Salzberg v. Sciabacucchi,45227 A.3d 102 (Del. 2020) (en banc). “our DGCL was intended to provide directors and stockholders with flexibility and wide discretion for private ordering and adaptation to new situations.”46Id. at 137. Despite such sweeping judicial rhetoric endorsing the practice, corporate private ordering is not without limitation. There are several features of private ordering efforts that may bear on the adjudication of their validity, namely: (1) the type of business entity involved; (2) where the private ordering is set forth; and (3) the right or actor involved.47See CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 232 (Del. 2008) (en banc); Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. 1952); Cox, supra note 23, at 258; Fisch, supra note 31 (manuscript at 18–19). How each of these features impacts the validity of private ordering mechanisms, as a general matter, is discussed in turn.

A.     The Type of Business Entity

The ability to privately order is not identical for all business entities. Unincorporated business entities like limited liability companies (“LLCs”) and limited partnerships (“LPs”) unequivocally embrace freedom of contract as a foundational characteristic. Delaware’s statutory framework for these entities is explicit: “[i]t is the policy of [the LLC Act and LP Act] to give maximum effect to the principle of freedom of contract and to the enforceability of [limited liability company agreements and partnership agreements].”48Del. Code Ann. tit. 6, §§ 17-1101(c), 18-1101(b) (2020); see also Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 290 (Del. 1999) (“The Delaware [LLC] Act has been modeled on the popular Delaware LP Act . . . The policy of freedom of contract underlies both the [LLC] Act and the LP Act.”); Leo E. Strine, Jr. & J. Travis Laster, The Siren Song of Unlimited Contractual Freedom, in Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations 11 (Robert W. Hillman & Mark J. Lowenstein eds., 2015).

In contrast, the ability to privately order in the corporate context finds its basis implicitly through a combination of an enabling corporate statute, the prevalence of contract theory in corporate law, and the judicial opinions that continue to endorse the contractual model of the corporation.49See Salzberg, 227 A.3d at 116; Cox, supra note 23, at 260–61. The lack of an explicit statutory declaration that the freedom of contract underpins the corporate form means, however, that the ability to privately order in corporations has limits not present in LLCs or LPs, as described below.50See Cox, supra note 23, at 282 (“The juxtaposition of LLC statutes with general corporation statutes not only invites but also confirms the conclusion that a clear distinction exists between the two with respect to the embrace of private ordering.”). But see Strine & Laster, supra note 48, at 17 (calling the contractual flexibility motivation cited for preferring alternative entities to the corporate form a “canard”). One such example is the ability to eliminate fiduciary duties of managers in LLCs and LPs. See, e.g., Peter Molk, Protecting LLC Owners While Preserving LLC Flexibility, 51 U.C. Davis L. Rev. 2129, 2138–39 (2018).

B.     Where Private Ordering Takes Place

Where corporate private ordering efforts take place—in the certificate of incorporation, the bylaws, or a private contract—is also a key factor for courts and scholars to consider when evaluating those efforts’ validity. By statute, the contents of Delaware certificates of incorporation are limited only to the extent a provision therein cannot be “contrary to the laws of this State.”51Del. Code Ann. tit. 8, § 102(b)(1) (2020); see, e.g., id. § 102(f) (prohibiting fee shifting provisions in the charter). Similarly, bylaws of Delaware corporations “may contain any provision . . . relating to the business of the corporation, the conduct of its affairs, and . . . the rights or powers of [the corporation,] its stockholders, directors, officers or employees” so long as such provision is “not inconsistent with law or with the certificate of incorporation.”52Id. § 109(b) (prohibiting fee shifting provisions in the bylaws). Accordingly, courts have understood this language to provide broad authorization for private ordering in corporate governing documents so long as they do not run afoul of the mandatory terms of corporate law.53See Salzberg, 227 A.3d at 115–16; Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 950, 953 (Del. Ch. 2013); In re Appraisal of Ford Holdings, Inc. Preferred Stock, 698 A.2d 973, 976 (Del. Ch. 1997) (“[Corporate law] is not, however, bereft of mandatory terms . . . Generally, these mandatory provisions may not be varied by terms of the certificate of incorporation or otherwise.”); see also Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 Nw. U. L. Rev. 542, 543 (1990); John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 Colum. L. Rev. 1618, 1632–33 (1989); Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89 Colum. L. Rev. 1549, 1553 (1989).

In addition, the differing process and consent requirements to amend the governing documents may play a role in the validity of private ordering. Given the ability of stockholders and the board to each unilaterally amend its provisions, a corporation’s bylaws is the predominant venue for corporate contracting.54See Ann M. Lipton, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583, 585–86 (2016); Ridgely, supra note 26, at 317, 319–20 (discussing the emerging use of bylaws to provide for corporate governance); see generally Choi & Min, supra note 43 (describing developments in using bylaws to provide for corporate governance rights). Courts have largely upheld bylaw amendments under theories of implied consent and reliance on the contract metaphor.55See ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 558 (Del. 2014) (en banc); Boilermakers, 73 A.3d at 956. Some scholars, however, have objected to the courts’ approval of private ordering in bylaws, questioning the validity of the implied consent theory56See Deborah A. DeMott, Forum-Selection Bylaws Refracted Through an Agency Lens, 57 Ariz. L. Rev. 269, 279, 282 (2015); Winship, supra note 26, at 496. and raising concerns regarding the unequal power of boards and stockholders to amend bylaws.57See CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 232 (Del. 2008) (en banc) (rejecting the argument that the board’s and stockholders’ ability to amend the bylaws is coextensive and holding that the stockholders’ ability to amend the bylaws is more limited); Fisch, supra note 43, at 382–83, 386–87, 409 (describing several aspects of the law that limit stockholders’ ability to “participate on an equal footing with boards in the private ordering process”).

In contrast to changes in the bylaws, charter amendments require both board and stockholder approval to be effective. Private ordering in the charter thus raises fewer concerns regarding consent and unequal power than unilateral bylaw amendments.58Del. Code Ann. tit. 8, § 242(b)(1) (2020) (detailing the amendment process); see Fisch, supra note 43, at 378 n.34 (“The requirement of joint action means that the contractual approach has different implications for the legitimacy of charter provisions . . . .”); Geis, supra note 26, at 631 (“It seems easy to locate an agreement for corporate charter modifications. The need for explicit approval from firm, shareholders, and state for these amendments should satisfy any understanding of the relevant counterparties.”). As a result, “stockholder-approved charter amendments are given great respect under [the] law.”59Salzberg v. Sciabacucchi, 227 A.3d 102, 116 (Del. 2020) (en banc); see Williams v. Geier, 671 A.2d 1368, 1381 (Del. 1996) (en banc) (stating that “Delaware’s legislative policy is to look to the will of the stockholders in [the areas of charter amendments and mergers]” because they each require stockholder action). Unless such a provision violates express statutory language or settled rules of public policy, private ordering in the charter will be respected and upheld by the court.60Salzberg, 227 A.3d at 115–16; Geier, 671 A.2d at 1381; see also Fisch, supra note 31 (manuscript at 15–17) (discussing the limitations on private ordering in organizational documents as being either express statutory limits or implicit mandatory corporate rules).

The dual approval requirement, however, makes private ordering in public company charters difficult and, as a practical matter, unlikely given that many private ordering efforts are motivated by competitions for power between stockholders and the board. See supra note 39 and accompanying discussion (discussing private ordering as a means for each of the board and stockholders to try to shift the balance of power in corporate governance). The exception to this would be pre-IPO amendments. See Salzberg, 227 A.3d at 109 & n.1 (describing the pre-IPO forum selection provisions adopted by Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc.); Winship, supra note 26, at 496 (“As there are no shareholders yet to give approval . . . pre-IPO charter provisions are unilaterally adopted.”).

Outside of corporate organizational documents, contractual corporate governance has also occurred in stockholder agreements, debt instruments, and commercial and consumer contracts.61See Fisch, supra note 20, at 1637, 1642–43 (describing “old governance” devices); Michelle M. Harner, The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing, 77 Fordham L. Rev. 703, 707–09 (2008) (discussing the ability of debt instruments to be used as levers of control over corporate governance). These other fora for private ordering have, by comparison, received little attention from courts and commentators. The rise in the use of stockholder agreements to contractually structure corporate governance, in particular at large corporations, has, however, begun to draw the attention of courts and scholars.62See, e.g., Fisch, supra note 31 (manuscript at 4–5); Rauterberg, supra note 25, at 2–3. While use of stockholder agreements in private corporations has been pervasive, their use as a tool for private ordering in larger and public corporations is a more recent development. See id. at 5 (“[A]bout 15% of companies that go public over the last six years do so subject to a shareholder agreement.”). In particular, recent Delaware decisions evaluating stockholder agreements have upheld their provisions using a contract law analysis.63See Rauterberg, supra note 25, at 17 (arguing that “a different paradigm of scrutiny is applied to the charter and bylaws versus the shareholder agreement,” affording wider limits on the freedom of contract to stockholder agreement provisions). As Professor Jill Fisch points out, these recent decisions “demonstrate the potentially expansive private ordering available through shareholder agreements” and “the growing trend of using shareholder agreements to engage in aggressive private ordering.”64Fisch, supra note 31 (manuscript at 5–6). She argues, however, that this trend is concerning and that private ordering should be limited to a corporation’s organizational documents.65Id. (manuscript at 6–10).

C.     The Right or Actor Affected

A third facet of private ordering that plays a critical role in enforceability is the agreement’s impact on the relationships and rights within the corporate form. As Professor George Geis observed,

[c]learly many corporate contracts are real—including those with suppliers, vendors, employees, creditors, and so on. But it is one thing to say that a corporation can make contracts and another thing to assert that a corporation is a contract. The latter implies that contract doctrine might regulate the governance relationship between shareholders and the firm (or among shareholders).66Geis, supra note 26, at 630.

In the context of preferred stockholders and bondholders, the courts have made clear that such senior claimants’ rights are contractual in nature, even when those rights are embodied in the charter.67See Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385–86 (Del. 2012); Shintom Co. v. Audiovox Corp., No. Civ.A. 693-N, 2005 WL 1138740, at *3 (Del. Ch. May 4, 2005) (stating section 151 established that “the rights that a preferred stockholder holds against the corporation are formed via contract, and the stockholder can only claim those rights enunciated in the certificate”); see also Gregory V. Varallo, Daniel A. Dreisbach & Blake Rohrbacher, Fundamentals of Corporate Governance 57 (2d ed. 2009) (“[R]ights and obligations of preferred shareholders are ‘essentially contractual’ . . . .”); Cox, supra note 23, at 273. The contractual approach for senior claimants is “easily understood to flow from the nature of the bondholder or preferred shareholder’s relationship to the corporation, which at its core is not simply that of being a provider of capital but doing so with no greater expectation than that the relationship is adversarial.”68Cox, supra note 23, at 272–73.

Outside of the senior claimant context, there are certain internal corporate affairs matters that are “essentially contractual in nature” such that the courts analyze them from a contractual approach.69Leo E. Strine, Jr., Lawrence A. Hamermesh & Matthew C. Jennejohn, Putting Stockholders First, Not the First-Filed Complaint, 69 Bus. Law. 1, 57 (2013). These matters include dividends, indemnification, and advancement.70See id.; see also Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 342–44 (Del. 1983). But not all internal corporate affairs matters can be modified and arranged through private ordering. Efforts, especially unilateral board actions, that impede fundamental corporate rights—like stockholders’ rights to vote or sell their shares—will likely attract significant judicial scrutiny and criticism.71See KFC Nat’l Council & Advert. Coop., Inc. v. KFC Corp., C.A. No. 5191-VCS, 2011 WL 350415, at *2 (Del. Ch. Jan. 31, 2011) (interpreting a charter provision in a manner that vested decision-making power in the traditional majority vote as opposed to vesting special rights in certain directors or stockholders); Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988) (referencing the “central importance of the [stockholder] franchise to the scheme of corporate governance” and applying heightened scrutiny to the directors’ actions); see also Shaner, supra note 25, at 1025 (“[A] provision falling in the fundamental rights category could be described as one that implicates the ‘rights and expectations established under existing corporate law.’”). Further, the courts have made clear that private ordering efforts that would “transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself” will be unenforceable.72Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 118 (Del. 1952).

Under Delaware law, for example, a corporation is required to have an annual meeting for the election of directors; is required to have shareholder approval for amendments to the certificate of incorporation; must have appropriate shareholder concurrence in the authorization of a merger; and is required to have shareholder approval in order to dissolve. Generally, these mandatory provisions may not be varied by terms of the certificate of incorporation or otherwise.73In re Appraisal of Ford Holdings, Inc. Preferred Stock, 698 A.2d 973, 976 (Del. Ch. 1997) (footnotes omitted).

Whether officer fiduciary duties and the application of the business judgment rule would similarly be considered mandatory features of corporate law, and thus immune from private ordering, is discussed in the next Part.

III.     Privately Ordering Officer Duties

The ability of corporations to contract some, but not all, internal matters raises the question: How far can private ordering go in changing the procedural and substantive relationships between and among the corporate governance participants—directors, officers, stockholders?74See Cox, supra note 23, at 258. Given the ABA Task Force’s focus on the substantive relationship of officers with the other participants, the remainder of this Article takes up that question. This Part first reviews the complementary fiduciary concepts of standards of conduct and standards of review in corporate law, then examines the extent to which those standards, as applied to corporate officers, may be privately ordered.

A.     Standards of Conduct and Standards of Review

Corporate law makes a distinction in fiduciary doctrine between standards of conduct and standards of review.75See Quadrant Structured Prods. Co. v. Vertin, 102 A.3d 155, 171–72 (Del. Ch. 2014) (“When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review. ‘The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.’” (footnote omitted) (quoting In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 35–36 (Del. Ch. 2013))); Melvin Aron Eisenberg, The Divergence of Standards of Conduct and Standards of Review in Corporate Law, 62 Fordham L. Rev. 437, 437 (1993); see also William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 Bus. Law. 1287, 1295–99 (2001); William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 Nw. U. L. Rev. 449, 451–52 (2002) [hereinafter Allen et al., Realigning the Standard]; E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance from 1992–2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1416–25 (2005) (distinguishing between the standards of fiduciary conduct and standards of review). Standards of conduct are the duties a fiduciary is expected to discharge in the course of performing her role within the corporate enterprise. Fiduciary duties, as standards of conduct, are outward facing: they define expectations of corporate actors, informing them how they should serve the corporation.76See Quadrant Structured, 102 A.3d at 172 (“The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care.” (quoting Trados II, 73 A.3d at 35)); Eisenberg, supra note 75, at 437 (“A standard of conduct states how an actor should conduct a given activity or play a given role.”). These expectations include the dual fiduciary duties of care and loyalty, as well as the “specific subsidiary fiduciary rules that elaborate on the application of [those broader primary duties]” like the duties of good faith, oversight, and disclosure.77Robert H. Sitkoff, An Economic Theory of Fiduciary Law, in Philosophical Foundations of Fiduciary Law 208 (Andrew S. Gold & Paul B. Miller eds., 2014); see also Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006) (en banc) (holding that directors owe the fiduciary duty of care and the duty of loyalty and that the obligation to act in good faith is not “an independent fiduciary duty that stands on the same footing as the duties of care and loyalty”); Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (en banc) (duty of disclosure); Smith v. Van Gorkom, 488 A.2d 858, 872–73 (Del. 1985) (en banc) (duty of care); Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939); In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 751 (Del. Ch. 2005); Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 971 n.16 (Del. Ch. 2003) (“The ‘duty to monitor’ is not a separate fiduciary duty, but rather stems from the core fiduciary duties of care and loyalty.”), aff’d, 845 A.2d 1040 (Del. 2004); In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996) (duty of oversight).

Standards of review, on the other hand, are the rules a court will apply in evaluating a fiduciary’s conduct to determine whether she breached her duties.78See Quadrant Structured, 102 A.3d at 172 (“The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.” (quoting Trados II, 73 A.3d at 35–36)); Eisenberg, supra note 75, at 437 (“A standard of review states the test a court should apply when it reviews an actor’s conduct to determine whether to impose liability or grant injunctive relief.”). The default standard of judicial review is the business judgment rule.79See Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011). The business judgment rule “is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”80Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (en banc). Other standards of review include entire fairness, Revlon’s enhanced scrutiny, Unocal’s intermediate scrutiny, Blasius, or Schnell. See Mary Siegel, The Illusion of Enhanced Review of Board Actions, 15 U. Pa. J. Bus. L. 599, 600 (2013); see also Emerald Partners v. Berlin, 787 A.2d 85, 89 (Del. 2001); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 181, 184 (Del. 1986); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954–55 (Del. 1985); Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971); Chen v. Howard-Anderson, 87 A.3d 648, 666–67 (Del. Ch. 2014); Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988).

As is often discussed in corporate scholarship, the standards of review and standards of conduct do not identically coincide.81See Allen et al., Realigning the Standard, supra note 75, at 451–52; Eisenberg, supra note 75, at 437–38; Julian Velasco, Fiduciary Duties and Fiduciary Outs, 21 Geo. Mason L. Rev. 157, 166–67 (2013). Rather, there is a significant gap between the ex ante fiduciary obligations espoused by the courts and the lower ex post standard of review under which an actor’s conduct must past judicial muster.82Professor Julian Velasco blames the divergence of standards of conduct and standards of review in corporate law on the strong presumptions attached to the business judgement rule. Velasco, supra note 81, at 167. Moreover, standards of review and conduct have not developed—and do not operate—in silos. For example, the business judgment rule was a corporate law construct long before the duty of care was embraced as a corporate norm; thus, the articulation of the standard of conduct for care was rooted in the business judgment rule standard of review.83See Henry Ridgely Horsey, The Duty of Care Component of the Delaware Business Judgment Rule, 19 Del. J. Corp. L. 971, 985, 996 (1994); Lyman Johnson, Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose, 38 Del. J. Corp. L. 405, 413 (2013); Johnson, supra note 34 (manuscript at 6).

In corporate jurisprudence, fiduciary doctrine is largely a creature of common law. Fiduciary duties, arising from the traditional powers of equity and enforceable by courts, serve as a check on the statutory authority of managers.84See Shaner, supra note 1, at 344 (“[C]orporate law places great weight on the concept of fiduciary duties, vesting power in the courts as the keepers of those duties in setting, maintaining, and enforcing the standards of conduct expected of managers.”). As applied to directors, the applicable standards of review and standards of conduct are relatively well-established, having been carefully crafted in thousands of court opinions.85See S. Samuel Arsht, The Business Judgment Rule Revisited, 8 Hofstra L. Rev. 93, 93 (1979) (stating that the business judgment rule was a principle of corporate governance for 150 years); Horsey, supra note 83, at 995; Shaner, supra note 1, at 335 (“Dating back to 1926, volumes of Delaware decisions have carefully crafted the fiduciary obligations of directors.” (footnote omitted)); Sitkoff, supra note 77, at 202 (“[T]he normal accretive process of common law development has . . . produc[ed] a rich body of interpretive authority on fiduciary matters.”). As described by Professor Edward Rock, notwithstanding “the fact-specific, narrative quality of Delaware opinions, over time [those decisions] yield reasonably determinative guidelines” for the role and duties of directors.86Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. Rev. 1009, 1017 (1997).

As applied to officers, however, the courts have been relatively silent, leaving scholars to speculate as to the exact contours of both the applicable standard of conduct and standard of review.87For discussions of the outstanding questions surrounding officer standards of conduct and standards of review, see Johnson & Garvis, supra note 3, at 1108 (discussing the outstanding issues following Gantler and stating that “[c]learly, the area of officer duties remains murkier than that of director duties”); Shaner, supra note 15, at 391–92; Shaner, supra note 13, at 29; Laster & Haas, supra note 13, at 8. The ABA Task Force’s project recommends private ordering as a way to clarify: (1) officer fiduciary duties; and (2) the applicability of the business judgment rule to officer actions. The following sections analyze these two aspects of corporate fiduciary doctrine, addressing the viability of private ordering for each aspect and discussing possible contractual drafting considerations.

B.     Standards of Conduct: Fiduciary Duties

1.     Viability of Private Ordering

The ability of corporations to privately order officer fiduciary duties is subject to both statutory and equitable limitations. These two limitations are discussed in turn.

a.     Statutory Limitations

In business associations more broadly, the laws governing contractual specification of fiduciary obligations fall along a spectrum. At one end of the spectrum are corporate statutes: the DGCL does not allow modification of director fiduciary duties.88The one exception to this statement is section 122(17) of the DGCL which allows for the corporate disclaimer of corporate opportunities. Del. Code Ann. tit. 8, § 122(17) (2020). While mechanisms such as exculpatory provisions, indemnification, and advancement can play a role in the impact of fiduciary liability, they do not limit the duties themselves. See infra note 104.

For examples of commentators arguing that director fiduciary duties are a mandatory aspect of corporate law, see Lucian Arye Bebchuk & Assaf Hamdani, Optimal Defaults for Corporate Law Evolution, 96 Nw. U. L. Rev. 489, 496 & n.16 (2002) (citing “the duty of loyalty of corporate directors” as a mandatory aspect of corporate law); Black, supra note 53, at 551–53 (1990); Melvin Aron Eisenberg, The Structure of Corporation Law, 89 Colum. L. Rev. 1461, 1486 (1989) (self-dealing rules are “largely mandatory, at least for publicly held corporations”); Marcel Kahan, The Qualified Case Against Mandatory Terms in Bonds, 89 Nw. U. L. Rev. 565, 607 n.164 (1995); Randall S. Thomas, What Is Corporate Law’s Place in Promoting Societal Welfare?: An Essay in Honor of Professor William Klein, 2 Berkeley Bus. L.J. 135, 139 (2005). But see Gabriel Rauterberg & Eric Talley, Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers, 117 Colum. L. Rev. 1075, 1077–78 (2017) (arguing that the ability to waive corporate opportunity claims means the duty of loyalty is no longer mandatory). And the Delaware courts have made clear that, for directors, fiduciary duties trump freedom of contract.89See CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 235 (Del. 2008) (en banc); Grimes v. Donald, No. Civ. A. 13358, 1995 WL 54441, at *7 (Del. Ch. Jan. 11, 1995), aff’d, 673 A.2d 1207 (Del. 1996). At the opposite end of the spectrum are Delaware’s alternative entity statutes—the LLC Act and LP Act—which allow modification, or even elimination, of fiduciary obligations of managers, members, or partners.90See Del. Code Ann. tit. 6, § 18-1101(c) (“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited lability company agreement . . . .”); id. § 17-1101(d) (“To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner’s or other person’s duties may be expanded or restricted or eliminated by provisions in the partnership agreement . . . .”). The one limitation on the ability to contractually modify fiduciary duties is that the implied duty of good faith and fair dealing cannot be eliminated; however, this obligation is not a true fiduciary duty, but rather arises from contract law. See id. (“[P]rovided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”); id. § 18-1101(c). Falling in the middle of the spectrum, though trending more towards alternative entities, are agency and partnership law, which allow limitation, but not elimination, of fiduciary duties.91See Unif. P’ship Act § 103(b)(3)(i) (Unif. L. Comm’n 2013) (providing that partners may not eliminate the duty of loyalty but may specify categories of activities that do not violate the duty so long as those categories are not “manifestly unreasonable”); Restatement (Third) of Agency § 8.07 (Am. L. Inst. 2006) (“An agent has a duty to act in accordance with the express and implied terms of any contract between the agent and the principal.”). On which part of this spectrum corporate officers fall is unclear.

Officers awkwardly straddle an agent-director fiduciary dichotomy. On the one hand, some courts, statutes, and treatises describe officers as agents of the corporation.92See Deborah A. DeMott, Corporate Officers as Agents, 74 Wash. & Lee L. Rev. 847, 850 (2017); A. Gilchrist Sparks, III & Lawrence A. Hamermesh, Common Law Duties of Non-Director Corporate Officers, 48 Bus. Law. 215, 222 (1992); see also Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 780 n.24 (Del. Ch. 2016) (“A vibrant debate exists over the extent to which the full agency law regime should apply to officers.”). On the other hand, however, Gantler and its progeny appear to situate officers in their own special director-like fiduciary role within the corporation.93See Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (en banc) (holding that officers owe “the same” fiduciary duties as directors). Adding to the confusion, the Delaware Court of Chancery recently described corporate officers as both agents and director-like fiduciaries of the corporation.94See Lebanon Cnty. Emps.’ Ret. Fund v. AmerisourceBergen Corp., C.A. No. 2019-0527-JTL, 2020 WL 132752, at *21 (Del. Ch. Jan. 13, 2020) (“Both as corporate fiduciaries and as agents, officers also have a duty to provide the board of directors with information that the directors need to carry out their duties and perform their statutory role.”). Given the consequences vis-à-vis the ability to contractually arrange fiduciary obligations, how officers are classified is a critical threshold issue that must be resolved.95Agency fiduciary duties can be modified by contract whereas director fiduciary duties largely cannot. Relatedly, the standards of conduct and standards of review for agents differ from those applicable to directors. For example, agents owe the duties of care, loyalty, and obedience to their principal. Directors, in contrast, only owe the duties of care and loyalty. See Megan Wischmeier Shaner, The Corporate Chameleon, 54 U. Rich. L. Rev. 527, 555 n.132 (2020) (summarizing the different standards of review and standards of conduct for agents and corporate directors).

For a discussion of the ambiguity surrounding the definition and classification of “officer” in corporate law, as well as a proposal for reform, see generally id.

State corporate codes provide little guidance on how to resolve issues involving officers or whether private ordering efforts to specify officer fiduciary duties are viable. Delaware, the decided leader in corporate law,96Delaware case law and statutes are generally considered to be the leading source for corporate law. See, e.g., Hon. William T. Allen, The Pride and the Hope of Delaware Corporate Law, 25 Del. J. Corp. L. 70, 71 (2000) (“[The DGCL] is certainly the nation’s and indeed the world’s leading organization law for large scale business enterprise.”); Chandler & Strine, supra note 10, at 959 (using Delaware law for their analysis as it is “generally representative of state corporate laws”); Larry E. Ribstein, Why Corporations?, 1 Berkeley Bus. L.J. 183, 230 (2004) (noting the “continued dominance of Delaware corporation law”). says very little in its corporate statutes about officers, even failing to define the term “officer.”97See Shaner, supra note 95, at 527–28 (discussing the definitional ambiguity in corporate law surrounding “officer”); see also Del. Code Ann. tit. 8, § 142 (2020) (addressing officers). Section 142 of the DGCL, the principal provision addressing the role of the officer,98Other provisions of the statute reference officers but do not directly address an officer’s rights, duties, or obligations. See, e.g., Del. Code Ann. tit. 8, § 141(e) (providing for director reliance on officer reports and presentations). provides only that: “Every corporation organized under this chapter shall have such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the board of directors which is not inconsistent with the bylaws . . . .”99Id. § 142 (emphasis added).

While one can argue that this language allows modification of officer fiduciary—as opposed to more general—duties, courts are highly unlikely to adopt that interpretation. In contrast to the DGCL, the statutory language in the Delaware LLC and LP provisions specifically allow modification of member, manager, or partner fiduciary duties.100See id. tit. 6, § 17-1101(d) (“To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership . . . .”) (emphasis added); cf. Giuricich v. Emtrol Corp., 449 A.2d 232, 238 (Del. 1982) (en banc) (“The legislative body is presumed to have inserted every provision for some useful purpose and construction, and when different terms are used in various parts of a statute it is reasonable to assume that a distinction between the terms was intended.” (quoting C & T Assocs. v. Gov’t of New Castle, 408 A.2d 27, 29 (Del. Ch. 1979))). Given the central role that fiduciary duties play in checking managerial power in corporations, absent express statutory language like that provided for LLCs and LPs, the courts will be resistant to reading such expansive contractual freedoms into section 142.101See Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 167–68 (Del. 2002) (en banc) (holding that, absent an express reference to elimination, the statute only permitted the expansion or restriction of fiduciary duties). But see Strine & Laster, supra note 48, at 17, 22 (questioning whether there is a substantial difference in the ability to contract in alternative entities versus corporations).

Another DGCL provision that bears on the ability to contractually structure officer duties is section 122. Section 122(17) allows a corporation to renounce any interest in specific business opportunities in its certificate of incorporation or by action of its board of directors.102Del. Code Ann. tit. 8, § 122(17). Such a charter provision or board action thus allows directors and officers to take advantage of certain types of business opportunities without running afoul of their duty of loyalty.103See 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 4.16[C] (3d ed. Supp. 2020).

While one could argue that section 122(17) supports the ability to contractually limit officer duties—in the charter or by the board through separate agreement—that argument is unpersuasive for several reasons. First, the Delaware courts have explained that a renunciation of corporate opportunities under section 122(17) operates as a waiver of, not a limitation on, a director’s or officer’s duty of loyalty.104See Holdings, Inc. v. ABS Cap. Partners Inc., C.A. No. 2017-0583-JTL, 2018 WL 3006118, at *8 (Del. Ch. June 15, 2018) (“The effect of this provision, which is authorized by Section 122(17) of the DGCL, is to waive any claim for breach of the duty of loyalty against [Director Defendants] based on either usurpation of a corporate opportunity or anticompetitive activity.”), aff’d, 204 A.3d 113 (Del. 2019).

Section 102(b)(7) of the DGCL further supports this conclusion. Section 102(b)(7) allows a corporation to exculpate directors for breaching their duty of care by including a provision in its charter. Del. Code Ann. tit. 8, § 102(b)(7). While sometimes described as a limitation on directors’ fiduciary duty of care, an exculpatory provision does not limit the content of the duty of care, but rather limits the extent of the remedy for a breach of such duty. Balotti & Finkelstein, supra note 103, § 4.19[A] n.1097 (“Note also that Section 102(b)(7) allows the certificate of incorporation of a Delaware corporation to limit or eliminate the financial liability of directors for breach of the duty of care . . . Such a limitation of liability does not, however, limit or eliminate the requirement that directors act with due care . . . .”); William E. Knepper & Dan A. Bailey, Liability of Corporate Officers and Directors § 7.04, at 217 (4th ed. 1988) (“The commentators agree that the new section [102(b)(7)] does not eliminate or alter a director’s fiduciary duty of care.”). That exculpation does not eliminate a director’s duty of care is demonstrated by the fact that exculpation only applies to money damages resulting from a breach, not to equitable damages such as an injunction. See also 5 Del. Laws 544 (1986) (commentary to section 102(b)(7)) (“This provision would have no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty.”). This is an important distinction: a waiver does not alter the content of an officer’s fiduciary duties, but merely signals the corporation’s relinquishment of its legal right to enforce a particular duty in a particular context.105See Waiver, Black’s Law Dictionary (11th ed. 2019) (“The voluntary relinquishment or abandonment—express or implied—of a legal right or advantage; Forfeiture.”). Second, even if read as a narrow fiduciary limitation, the legislature’s use of specific statutory language in section 122(17) to authorize the limitation of directors’ and officers’ duty of loyalty indicates that the corporation’s authority to modify “duties” under section 142 does not extend to those duties that are fiduciary in nature.106See Del. Code Ann. tit. 8, § 122(17); id. § 142. Indeed, under the canon of construction “expressio unius est exclusio alterius,” reading section 122(17) to limit an officer’s duty of loyalty further supports the premise that any limitation or elimination of officer fiduciary duties requires specific statutory language similar to that of section 122.107This is the negative implication canon of statutory construction—expressio unius est exclusio alterius—meaning to “include one thing implies the exclusion of the other, or of the alternative.” Expressio Unius Est Exclusio Alterius, Black’s Law Dictionary (11th ed. 2019). Cf. Del. Code Ann. tit. 8, § 102(b)(7) (providing for exculpation for breaches of the duty of care for directors but not for officers); State v. Fletcher, 974 A.2d 188, 193 (Del. 2009) (en banc) (“It is assumed that when the General Assembly enacts a later statute in an area covered by a prior statute, it has in mind the prior statute and therefore statutes on the same subject must be construed together so that effect is given to every provision unless there is an irreconcilable conflict between the statutes, in which case the later supersedes the earlier.” (quoting State Dept. of Labor v. Minner, 448 A.2d 227, 229 (Del. 1982))).

Outside of Delaware, however, one can make a stronger argument in favor of the validity of private ordering of officer fiduciary duties. Ohio’s corporate statute, for example, more directly addresses officer standards of conduct and standards of review and the ability to alter them contractually.108See Ohio Rev. Code Ann. § 1701.641 (LexisNexis 2020). In pertinent part, section 1701.641 of the Ohio code provides that:

(A) Unless the articles, the regulations, or a written agreement with an officer establishes additional fiduciary duties, the only fiduciary duties of an officer are the duties to the corporation set forth in division (B) of this section.

(B) An officer shall perform the officers duties to the corporation in good faith, in a manner the officer reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances . . . .

(D) An officer shall be liable in damages for a violation of the officers duties under division (B) of this section only if it is proved by clear and convincing evidence in a court of competent jurisdiction that the officers action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or undertaken with reckless disregard for the best interests of the corporation. This division does not apply if, and only to the extent that, at the time of an officers act or omission that is the subject of the complaint, either of the following is true:

(1) The articles or the regulations of the corporation state by specific reference to division (D) of this section that the provisions of this division do not apply to the corporation.

(2) A written agreement between the officer and the corporation states by specific reference to division (D) of this section that the provisions of this division do not apply to the officer.109Id.

The default fiduciary duties that section 1701.641(A) and (B) imposes on officers are essentially the same duties that the Ohio code imposes on directors.110See id. § 1701.59 (director duties); see also Jeffrey R. Wahl, SB 181: Everything You Need to Know About the Corporation Law Committee’s Newest Legislation, 27 Ohio Prob. L.J. 14 (2017). Under section 1701.641(A), a corporation can, however, impose additional fiduciary duties on an officer via its charter, corporate regulations, or a written agreement with the officer.111Ohio Rev. Code Ann. § 1701.641(A). By stating only that a corporation can add fiduciary duties, the Ohio statute implies, though, that default fiduciary duties cannot be eliminated. Moreover, the standard of liability articulated in section 1701.641(D) establishes default liability standards for officers that are, again, akin to those of directors.112See Wahl, supra note 110. Subsection (D) does allow modification of those standards, however, by permitting a corporation to opt out of the subsection’s liability standard by including a provision in its charter, bylaws, or in a written agreement.113Ohio Rev. Code Ann. § 1701.641(D)(1)–(2); see also Wahl, supra note 110.

In sum, when compared to the DGCL, the Ohio code provides greater clarity with respect to the default fiduciary duties and standards of review for officers, while also recognizing limited means for contractually arranging such duties and standards. While Ohio’s statute does not permit broad discretion to privately order officers’ duties, it does indicate that, at least in some jurisdictions, corporations are permitted to engage in some degree of private ordering of officer fiduciary duties.114See also Task Force Working Paper, supra note 19, at 8 (reaching a similar conclusion).

b.     Equitable Limitations

In corporate law, it is not enough that corporate contracting may be legally taken, such action must also be equitable to be valid.115This is described as the “law-equity divide” in Delaware jurisprudence. Sample v. Morgan, 914 A.2d 647, 672 (Del. Ch. 2007) (stating that under Delaware law decisions by fiduciaries are “‘twice-tested’—once by the law and again by equity”); Leo E. Strine, Jr., If Corporate Action Is Lawful, Presumably There Are Circumstances in Which It Is Equitable to Take That Action: The Important Corollary to the Rule of Schnell v. Chris-Craft, 60 Bus. Law. 877, 880 (2005). As the Delaware Supreme Court explained in ATP Tour, Inc. v. Deutscher Tennis Bund11691 A.3d 554 (Del. 2014) (en banc). in relation to fee-shifting bylaws, whether a specific facially valid bylaw would be enforced “depends on the manner in which it was adopted and the circumstances under which it was invoked.”117Id. at 558; see also Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971). Thus even assuming, arguendo, that case law and statutes permit corporations to modify or eliminate officer fiduciary duties, equitable considerations may still limit the validity of such efforts.

To ensure that directors do not misuse their broad managerial authority, they “are charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders.”118Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993). In making decisions, directors must comply with their fundamental fiduciary duties of loyalty and care.119See Strine, supra note 115, at 880. Professor Lyman Johnson accurately summarized the fiduciary predicament that directors face in attempting to privately order officer duties:

[G]iven that officers cannot be exculpated from personal liability for breaching their duties under Delaware law, and given the Supreme Court’s description of fiduciary duties as “immutable,” it is doubtful that boards of directors—themselves fiduciaries—could reduce (or eliminate) ex ante the fiduciary standards applicable to officers, or act to lessen the consequences of fiduciary duty breaches, whether by means of employment contracts or through bylaw amendments.120Johnson, supra note 16, at 190 (footnote omitted) (quoting Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1280 (Del. 1989)).

In other words, directors would be hard pressed to successfully defend the decision to grant executive officers broad corporate authority and deference in exercising such authority, while at the same time limiting, or eliminating, any protection from abuse of such power. Surrendering a central tool for reducing managerial agency costs seems to run contrary to the board’s own fiduciary responsibility of oversight.121See Mills Acquisition, 559 A.2d at 1281 (“While a board of directors may rely in good faith upon ‘information, opinions, reports or statements presented’ by corporate officers, employees and experts ‘selected with reasonable care,’ it may not avoid its active and direct duty of oversight in a matter as significant as the sale of corporate control.” (quoting Del. Code Ann. tit. 8, § 141(e) (2020))); Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963); Balotti & Finkelstein, supra note 103, § 4.16[B] (“Directors must, at a minimum, take some steps to see that the officers of the corporation are properly managing its business and affairs.”). To the extent that privately ordering officer fiduciary duties is framed as an abdication of the board’s oversight duties, it would be invalidated by the courts. See Grimes v. Donald, C.A. No. 13358, 1995 WL 54441, at *9 (Del. Ch. Jan. 11, 1995), aff’d, 673 A.2d 1207 (Del. 1996) (en banc).

2.     Contracting Considerations

Assuming that officer fiduciary duties can be contractually structured, what issues will arise as corporations, boards, officers, and their counsel draft these provisions? This Section discusses some of the drafting considerations that are implicated regardless of whether the private ordering is situated in the charter, the bylaws, or a private agreement.

First, private ordering of officer fiduciary duties will be the product of human effort and thus is subject to error and ambiguity. Behavioral bias and limitations—like bounded rationality, framing and endowment effects, self-interestedness, and status quo bias, among others—can impact the drafting of a provision. Legal scholars, for example, have observed patterns in charters suggesting the influence of these types of behavioral phenomena on their drafting.122See, e.g., Marcel Kahan & Michael Klausner, Path Dependence in Corporate Contracting: Increasing Returns, Herd Behavior and Cognitive Biases, 74 Wash. U. L.Q. 347, 361 (1996); Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757, 822 (1995). See generally Brian JM Quinn, Shareholder Lawsuits, Status Quo Bias, and Adoption of the Exclusive Forum Provision, 45 U.C. Davis L. Rev. 137, 173–82 (2011) (summarizing research on behavioral economics).

Moreover, scholars across all disciplines agree that structuring a relationship and accurately reducing parties’ expectations to words is a difficult, if not impossible, task. And the probability for error is even higher when, as is the case organizational documents, language is intended to project into the future and govern a long-term relationship.123Shaner, supra note 25, at 1018–19 (footnote omitted); see also Harold Dubroff, The Implied Covenant of Good Faith in Contract Interpretation and Gap-Filling: Reviling a Revered Relic, 80 St. John’s L. Rev. 559, 576 (2006) (“[C]ourts, whether implicitly or explicitly, and regardless of their jurisprudential philosophy . . . acknowledge the impracticality (due to transaction costs) and the impossibility (due to the limits of human imagination . . . ) of producing an all-encompassing, express agreement.”); Joseph A. Grundfest, The History and Evolution of Intra-Corporate Forum Selection Clauses: An Empirical Analysis, 37 Del. J. Corp. L. 333, 382–83 (2012) (“To be sure, every contract is incomplete, and this forum selection language can generate disputes over its application in specific instances . . . .”); Claire A. Hill, Bargaining in the Shadow of the Lawsuit: A Social Norms Theory of Incomplete Contracts, 34 Del. J. Corp. L. 191, 193–94, 198 (2009); Ralph James Mooney, The New Conceptualism in Contract Law, 74 Or. L. Rev. 1131, 1147 (1995) (“The assumption that most parties in fact reduce their entire agreement to a single, perfectly accurate writing [is] unrealistic.”); E. Norman Veasey & Jane M. Simon, The Conundrum of When Delaware Contract Law Will Allow Evidence Outside the Contract’s “Four Corners” in Construing an Unambiguous Contractual Provision, 72 Bus. Law. 893, 895 (2017) (“It is a rare contract that needs absolutely no interpretation.”); Eric A. Zacks, Contract Review: Cognitive Bias, Moral Hazard, and Situational Pressure, 9 Ohio St. Entrepreneurial Bus. L.J. 379, 380 (2015) (“Drafting and reviewing a written contract is already understood to be a complicated and complex process.”).

As scholars, judges, and practitioners agree, fiduciary duties, as a general matter, are relatively undefined and highly contextual in nature, making prediction difficult.124See Rock, supra note 86, at 1101–03 (discussing the “[m]ushiness of Delaware [f]iduciary [d]uty [c]ase [l]aw”). While “the normal accretive process of common law development has ameliorated this problem by producing a rich body of interpretive authority on fiduciary matters,”125Sitkoff, supra note 77, at 202; see also Rock, supra note 86, at 1017. attempting to reduce decades of fiduciary cases to finite contractual language is a challenging, perhaps impossible task. As two prominent Delaware jurists have observed in the LLC context—where parties already engage in this type of contracting—“the free-writing in delineating or eliminating fiduciary duties that commonly occurs within the operating agreement is a poor substitute for what can be accomplished within the corporate context.”126Cox, supra note 23, at 282 n.102 (citing Strine & Laster, supra note 48, at 11). Thus, fiduciary duty provisions will often be flawed, necessitating judicial involvement.127See Coffee, supra note 53, at 1620 (asserting that just like judicial involvement in long-term contracts, “judicial involvement [in corporate governance] is not an aberration but an integral part of such contracting”).

In addition, the underlying problem—the uncertainty surrounding officer fiduciary duties—that private ordering solutions are intended to remedy complicates parties’ ability to effectively contract in this space. The ability to contractually shape a fiduciary relationship with an officer assumes that the parties can start from statutory or common law default principles of law.128Strine & Laster, supra note 48, at 11. Where, as is currently the case, parties lack a common understanding of the relevant default legal fiduciary duty principles, any negotiation and private ordering will inherently be ambiguous and litigious. Indeed, the lack of established default principles has been one of the critiques of private ordering efforts in the LLC and LP context.129See id. In the absence of a set of standard defaults, parties will incur material transaction costs in the drafting process. Unable to rely on their mutual understandings of default principles of law, parties will be forced to “evaluate entity-specific provisions, ostensibly bargained for on an investment-by-investment basis to protect their interests.”130Id. at 12. Moreover, to the extent boards are negotiating fiduciary duties with each individual officer, such officer-specific tailoring will merely compound already high transaction costs.131See id. at 18.

The risks and transaction costs described above will vary depending on jurisdiction. Delaware, on the one hand, has no statutory guidance and little common law guidance regarding officer fiduciary duties.132See id. at 16 (noting that the primary enforcement mechanism for breaches of fiduciary duties is “the ability of stockholders to sue directors in the courts for breach of their duty of loyalty”). Thus, transaction costs for private ordering officers in Delaware corporations will be high. On the other hand, states that have adopted versions of the Model Business Corporation Act (“MBCA”) provide some statutory guidance regarding officer conduct.133See Model Bus. Corp. Act § 8.42 (Am. Bar Ass’n 2016) (standards of conduct for officers). The MBCA’s language regarding officer duties, however, only ameliorates the transaction costs attendant to private ordering to a limited degree. There are still many unresolved issues surrounding officers in MBCA jurisdictions, including the lack of definitional clarity (i.e., who is an “officer”?) and the exact contours of the subsidiary fiduciary duties that are derived from the broader primary duties of care and loyalty.134See Shaner, supra note 95, at 528 (discussing the lack of a cohesive definition for “officer” in corporate law); see also DeMott, supra note 92, at 850 (discussing the definitional fluidity of “officer”). Indeed, the MBCA recognizes the important role of common law development of the duties in supplementing the baseline principles its provisions offer officers.135See Model Bus. Corp. Act § 8.31 official cmt. at 189. Thus, even under the MBCA, or similarly drafted statutes, the transaction costs of privately ordering officer fiduciary duties will still remain fairly high.

In sum, regardless of the jurisdiction, the uncertainty surrounding officer duties means that private ordering solutions will carry material transaction costs in the ex ante negotiating and drafting process and the ex post enforcement process.136In the end, the transaction costs may be deemed prohibitively high such that firms do not engage in private ordering. Cf. Michael Klausner, The Contractarian Theory of Corporate Law: A Generation Later, 31 J. Corp. L. 779, 784 (2006) (“The contractarian theory has turned out to be based largely on an entirely plausible, but in fact imaginary, world of contracting.”).

C.     Standards of Review: The Business Judgment Rule

1.     Viability of Private Ordering

The business judgment rule is a “cornerstone concept in corporate law.”137Lyman P.Q. Johnson, Corporate Officers and the Business Judgment Rule, 60 Bus. Law. 439, 440 (2005). Corporate directors clearly enjoy the protections of the business judgment rule—the “presumption that that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”138Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (en banc). Whether officers enjoy similar judicial deference is uncertain. Commentary and case law on the issue are sparse and seem to point in both directions.139Compare Grassmueck v. Barnett, No. C03-122P, 2003 WL 22128263, at *3 (W.D. Wash. July 7, 2003) (business judgment rule applies to officers); In re Musicland Holding Corp., 398 B.R. 761, 788 (Bankr. S.D.N.Y. 2008) (same); Stanziale v. Nachtomi, 330 B.R. 56, 61 (Bankr. D. Del. 2004) (same); FDIC v. Loudermilk, 761 S.E.2d 332, 338 (Ga. 2014) (business judgment rule applies to officers under Georgia law); Biren v. Equal. Emergency Med. Grp., 125 Cal. Rptr. 2d 325, 328, 332 (Cal. Ct. App. 2002) (business judgment rule applies to protect CFO); Model Bus. Corp. Act § 8.42 official cmt. at 197 (business judgment rule applies); Principles of Corporate Governance: Analysis and Recommendations § 4.01 (Am. L. Inst. 2019) [hereinafter ALI Principles] (applying the business judgment rule to officers); Harry G. Henn & John R. Alexander, Laws of Corporations and Other Business Enterprises § 242 at 663 (3d ed. 1983) (stating that the business judgment rule “is no less applicable to officers in the exercise of their authority”); Lawrence A. Hamermesh & A. Gilchrist Sparks III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Law. 865, 873 (2005), and Sparks & Hamermesh, supra note 92, at 229–37, with Palmer v. Reali, 211 F. Supp. 3d 655, 666 n.8 (D. Del. 2016) (“Defendants have cited to no cases where a Delaware court has held that the business judgment rule applies to corporate officers . . . .”); FDIC v. Florescue, No. 8:12-cv-2547-T-30TBM, 2013 WL 2477246, at *4–5 (M.D. Fla. June 10, 2013) (officers are not protected by the business judgment rule under Florida law); FDIC v. Perry, No. CV 11-5561-ODW (MRWx), 2012 WL 589569, at *4 (C.D. Cal. Feb. 21, 2012) (no business judgment rule for officers under California law); Platt v. Richardson, Civ. No. 88-0144, 1989 WL 159584, at *2 (M.D. Pa. June 6, 1989) (“The business judgment rule applies only to directors of a corporation and not to officers.”); Johnson, supra note 137, at 458–69 (discussing policy reasons why the business judgment rule should not apply to officers), and Johnson & Millon, supra note 7, at 1642–43. Delaware—the leading corporate law jurisdiction—has acknowledged the uncertainty, but to date has yet to provide any conceptual or positive law on the matter.140This includes both statutory and case law guidance. See, e.g., Palmer, 211 F. Supp. 3d at 666 n.8 (“Defendants have cited to no cases where a Delaware court has held that the Business Judgment Rule applies to corporate officers . . . .”); Chen v. Howard-Anderson, 87 A.3d 648, 666 n.2 (Del. Ch. 2014) (noting that the business judgment rule’s application to officers is unsettled). In light of the uncertainty, can parties contractually structure the degree of deference a court should apply in reviewing officer conduct?141See Johnson, supra note 137, at 441 (“[W]hat degree of deference (or scrutiny) should courts bring to their review of challenged officer conduct?”).

The ability to contractually provide for application of the business judgment rule to officers will depend on the jurisdiction. While Delaware refrains from articulating either standards of conduct or standards of review in its statutes, leaving them as common law principles,142See id. at 447. other corporate codes do. For example, the MBCA recognizes the business judgment rule’s applicability to officers’ decisions so long as they are acting within their discretionary authority.143Model Bus. Corp. Act § 8.42 official cmt. at 199; see also Nev. Rev. Stat. § 78.138(7) (2019); Ohio Rev. Code Ann. § 1701.641 (LexisNexis 2020). This leaves open the question, however, as to whether the business judgment rule would apply to officer decisions outside of such discretionary authority. In its commentary, however, the MBCA drafters make clear that

[t]he elements of the business judgment rule and the circumstances for its application continue to be developed and refined by courts. Accordingly, it would not be desirable to freeze the concept in a statute. Thus, [the MBCA] does not codify the business judgment rule as a whole, although certain of its principal elements, relating to personal liability issues, are reflected in [it].144Model Bus. Corp. Act § 8.31 official cmt. at 189. The commentary to section 8.42 explains that the relevant principals of section 8.31 (standards of liability for directors) also apply to officers. See id. § 8.42 official cmt.

The American Law Institute’s Principles of Corporate Governance are more affirmative than the MBCA in addressing the business judgment rule’s application to officers, providing that an officer’s duty of care “is subject to the provisions of . . . (the business judgment rule) where applicable.”145ALI Principles, supra note 139, § 4.01(a), (c). The different formulations of the business judgment rule by Delaware, the ALI, and the MBCA can be described as follows: “[Delaware’s] model is a presumption, while the [ALI formulation] is a safe harbor.”146Elizabeth S. Miller & Thomas E. Rutledge, The Duty of Finest Loyalty and Reasonable Decisions: The Business Judgment Rule in Unincorporated Business Organizations?, 30 Del. J. Corp. L. 343, 348 (2005). And the MBCA’s language “recognizes the business judgment rule and provides guidance as to its application” but explicitly refrains from serving as a codification of the rule.147Id.; see Model Bus. Corp. Act § 8.31 official cmt at 189.

An analysis of specific jurisdictions illustrates the varying viability of contractually structuring the business judgment rule. In jurisdictions, like Ohio and Nevada, where the business judgment rule is codified in statute,148See Nev. Rev. Stat. § 78.138(3) (“Except as otherwise provided in subsection 1 of NRS 78.139, directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.”); Ohio Rev. Code Ann. § 1701.641(C)(1) (“In any action brought against an officer, the officer shall not be found to have violated the officer’s duties under division (B) of this section unless it is proved by clear and convincing evidence that the officer has not acted in good faith, in a manner the officer reasonably believes to be in or not opposed to the best interests of the corporation, or with the care that an ordinarily prudent person in a like position would use under similar circumstances.”). the ability to privately order the rule is unlikely absent express statutory authority. The inability to contract the rule in these jurisdictions may, however, be a nonissue as the codification of the rule leaves no uncertainty in the standard of review applicable to officers necessitating private ordering.149See, e.g., Nev. Rev. Stat. § 78.138(7); Ohio Rev. Code Ann. § 1701.641(C)(1).

On the other end of the spectrum, in jurisdictions like Delaware that apply a presumption and, to some degree, in jurisdictions that adopt the MBCA’s language, the ability to contractually provide for the business judgment rule is more nuanced.150Another complicating factor is an issue raised by Professor Johnson—whether standards of review are “law” or not. See Johnson, supra note 34 (manuscript at 28–30). It is unclear how the resolution of such issue might impact the viability of private ordering. There, the business judgment rule exists as a common law standard of judicial review and thus there is no statutory authority on which to rely in determining the viability of private ordering. In the absence of express statutory language, the Delaware courts have made clear that the only other limit on private ordering is if a provision runs contrary to settled rules of public policy.151See Salzberg v. Sciabacucchi, 227 A.3d 102, 116 (Del. 2020) (en banc) (holding that a charter amendment will not be invalidated “provided that it does not transgress a statutory enactment or a public policy”); Fisch, supra note 31 (manuscript at 11–13) (discussing the limitations on private ordering in organizational documents as being either express statutory limits or implicit mandatory corporate rules). It should be noted that with bylaws there is one other limit—that it cannot be contrary to the charter. See Del. Code Ann. tit. 8, § 109(b) (2020). Some scholars have argued that private contracting (e.g., employment and shareholder agreements) should be “subject to the traditional hierarchy of governance tools” (i.e., the charter and bylaws). E.g., Fisch, supra note 31 (manuscript at 9). Along those lines, the pertinent inquiry is: Does an officer business judgment rule violate public policy? Unfortunately, the answer to this depends upon first resolving underlying questions as to whether (and why) the business judgment rule applies, or does not apply, to officers under default legal principles.152While this is still an open question in Delaware, California courts have, by contrast, provided more definitive guidance. Several federal district court opinions have held that, under California law, the business judgment rule does not apply to corporate officers. See FDIC v. Van Dellen, No. CV 10-4915 DSF (SHx), 2012 WL 4815159, at *6 (C.D. Cal. Oct. 5, 2012); FDIC ex rel. Cnty Bank v. Hawker, No. CV F 12-0127 LJO DLB, 2012 WL 2068773, at *7 (E.D. Cal. June 7, 2012); FDIC ex rel. Indymac Bank, F.S.B. v. Perry, No. CV 11-5561-ODW (MRWx), 2012 WL 589569, at *3 (C.D. Cal. Feb. 21, 2012); see also Gaillard v. Natomas Co., 256 Cal. Rptr. 702, 711–12 (Cal. Ct. App. 1989). Thus, a contractual business judgment rule could be found to violate California public policy.

As a standard of review, the business judgment rule and fiduciary duties are, however, intertwined. Indeed, where a standard of review is calibrated essentially sets the bar for compliance with the fiduciary standard of conduct.153See Johnson, supra note 34 (manuscript at 26–27). The duty of care and the business judgment rule, for example, illustrate this interdependency. As explained by Professor Johnson: “[T]he business judgment rule preceded a clear articulation of the duty of care and the standard of conduct (care) thus became embedded in the standard of review (the business judgement rule).”154Id. (manuscript at 6); see also Horsey, supra note 83, at 985–97 (describing the evolution of the duty of care and the business judgment rule); Johnson, supra note 83, at 413 (“[T]he duty of care, for corporate directors at least, became doctrinally embedded in the still regnant business judgment rule only about 20 years ago. The business judgment rule, first to arrive on the Delaware legal scene, remained predominant, with the director duty of care (and the duty of loyalty) being subsumed within it.” (footnote omitted)).

The discussion regarding the viability of fiduciary duty contracting is thus instructive when considering the viability of privately ordering application of the business judgment rule. To the extent that courts would be hesitant to allow parties to privately arrange officer fiduciary duties, such concerns would also be present with respect to the business judgment rule. This would be especially true if courts held that parties were unable to privately order fiduciary duties: contractual business judgment rules could be viewed as a backdoor means of limiting those duties.

Finally, as discussed above in the context of fiduciary standards of conduct, the board’s own fiduciary duties would be implicated in (and perhaps would limit) any effort to contractually structure business judgment rule presumptions for officers.155See discussion supra Part III.B.1.b.

2.     Contracting Considerations

As discussed above, whether the business judgment rule, as a matter of law, applies to officers is an open question. While the courts have largely remained silent on this issue, a lively debate exists among academics and experts in the field.156Compare Johnson, supra note 137, at 458–69 (arguing that the business judgment rule should not be extended to officers), with Hamermesh & Sparks, supra note 139, at 865, and Sparks & Hamermesh, supra note 92, at 229–37. Assuming, arguendo, that courts will enforce contractually provided business judgment rule protections for corporate officers, this Section proposes a framework for privately ordering business judgment rule deference that strikes a balance between the competing arguments—those in favor of managerial deference versus those concerned about managerial accountability—raised in the literature.

Proponents of business judgement rule protection point out that officers are empowered to exercise discretion and judgment with respect to both executive and administrative functions.157See Shaner, supra note 13, at 39–40. This director-like authority (indeed, for executive officers it is a direct delegation of directors’ statutory authority) implicates the policy rationales that underlie the business judgment rule,158See Hamermesh & Sparks, supra note 139, at 865 (“We continue to believe that the policy rationales underlying the development and application of the business judgment rule to corporate directors similarly justify application of the rule to non-director officers, at least with respect to their exercise of discretionary delegated authority.”); Sparks & Hamermesh, supra note 92, at 229–37. The policy rationales frequently cited as justifying the business judgement rule are (1) encouraging risk-taking in managing a corporation’s business and affairs, (2) avoiding judicial second-guessing of business decisions, and (3) recognizing the corporate governance structure and the centrality of the board in such structure. See Johnson, supra note 137, at 455–58 (summarizing the policy rationales for the business judgment rule). Notably, Professor Johnson argues that these policy rationales support the position that the business judgment rule should not apply to officers in the same manner as directors. Id. at 440. thus supporting its application to officers as well as directors.

On the other hand, objections to extending business judgement rule deference to corporate officers typically focus on the different roles, rights, and responsibilities that officers have as compared to directors. These fundamental differences, critics point out, undermine much of the reasoning behind the business judgment rule’s protections.159See Johnson, supra note 137, at 441 (“In fact, one rationale in particular—judicial respect for the board’s governance role—strongly disfavors application of the rule to officers in those instances where the board elects to pursue a claim of wrongdoing.”).

For example, one rationale for extending business judgment rule deference to directors is that they are generally less involved in the daily operations of the corporation and must rely on the information and reports made to them by officers.160See Balotti & Shaner, supra note 13, at 170. Executive officers, by contrast, are intimately involved in the day-to-day management of the business. “[W]ith greater access to the books and records of the corporation and a more intimate knowledge of the business and affairs of the corporation, one of the primary functions of officers is to be fully informed with respect to the corporate enterprise and to report to the board.”161Id. at 171. Given their high-ranking status and “access to considerably more and better information than directors,” officers should be held to a more exacting judicial standard of review than directors.162Johnson, supra note 137, at 460. Other statutory protections that are available to directors, but not officers, have been justified on similar grounds. See, e.g., Del. Code Ann. tit. 8, §§ 102(b)(7), 141(e) (2020). For example, corporate statutes recognize the importance of the officer’s role in the board’s ability to fulfill its statutory and fiduciary responsibilities, providing directors with statutory protection for relying on these individuals. See id. § 141(e); DeMott, supra note 92, at 870. In Delaware, officers do not enjoy a similar statutory protection. See Balotti & Shaner, supra note 13, at 172 (“Because directors are entitled to such protection, officers should arguably be held to a strict standard of care and requirement to be fully informed. As a result, allowing officers, in turn, to receive a similar safe harbor in relying on other individuals in meeting their standard of care and duty to be informed would undermine the rationale underlying the statutory protections provided to directors.”). Accordingly, officers’ managerial role, as well as their more lucrative compensation, differentiates these individual from directors such that the conventional rationales for applying the business judgment rule do not support the rule’s application to officers.163See Johnson, supra note 137, at 441, 459–60 (describing how “officers receive significantly greater rewards from a corporation than do directors” and explaining that senior executive wealth more generally is substantial such that they are unlikely to “play it safe” in decision-making in an effort to protect their investment in the corporation). Professor Johnson applies the standard business judgment rule rationales to officers and concludes that while one rationale—avoiding judicial second-guessing of business decisions—does apply to officers, the other two rationales—encouraging risk-taking and preserving the board’s governance role—do not. Id. 458–69.

The opposing positions raised by the two camps can be summarized as managerial deference versus managerial accountability. A limited application of the business judgment rule based on corporate hierarchy assuages the concerns on both sides of the debate. State laws generally treat “officers” as a monolith, failing to provide any gradation within this class of corporate actor.164In fact, state corporate law fails to provide any clarity regarding the boundaries of “officer” status as a general matter. See Shaner, supra note 95, at 555. Yet not all officers are the same. Senior executive officers, often referred to as the C-Suite, occupy positions of immense power and authority within the corporation, most often having their power delegated directly from the board.165These officers typically include senior executive officers like the chief executive officer, chief operating officer, chief financial officer, chief legal officer, and chief privacy officer. See Joan MacLeod Heminway, The Last Male Bastion: In Search of a Trojan Horse, 37 U. Dayton L. Rev. 77, 78 (2011) (defining C-Suite as “the senior executive team in the firm”); Thomas F. O’Neil III & T. Brendan Kennedy, Answering to a Higher Authority: Sovereign-Mandated Oversight in the Board Room and the C-Suite, 17 Fordham J. Corp. & Fin. L. 299, 299 n.1 (2012) (“The ‘C-Suite’ refers to ‘Control Suite,’ common parlance for the senior management team of corporate entities.”). At the other end of the spectrum, a corporation may have numerous vice presidents, executive vice presidents, senior vice presidents, assistant treasurers, and the like, most of whom are officers in name only and have responsibilities akin to rank-and-file employees.166The proliferation of figurehead officers is a trend recognized across disciplines and industries. See Ownership Reports and Trading by Officers, Directors and Principal Stockholders, 53 Fed. Reg. 49,997, 50,000 (Dec. 13, 1988) (codified at 17 C.F.R. pt. 240 (2020)) ( “[O]f particular concern is the inclusion of all vice presidents in the definition [of ‘officer’ and that] [m]any businesses give the title of vice president to employees who do not have significant managerial or policymaking duties and are not privy to inside information.” (footnote omitted)); James D. Cox & Thomas Lee Hazen, 1 Treatise on the Law of Corporations § 8:2 (3d ed. 2019) (“A large corporation may have a number of vice presidents, assistant vice presidents, assistant secretaries, assistant treasurers, and so on . . . As the number of vice presidents in corporations has proliferated, super vice presidencies under such titles as ‘executive vice president’ or ‘senior vice president’ have been created . . . .”); see also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Livingston, 566 F.2d 1119, 1121 (9th Cir. 1978) (finding that a corporation had “approximately 350 ‘Executive Vice Presidents’”). A business judgement rule structured to take into account the variation in types of officers would be well-suited to further the business judgment rule’s policy rationales while avoiding overbroad application.167Professor Lawrence Hamermesh and attorney Gil Sparks propose a different modified business judgment rule for officers based on whether the officer was acting within his delegated or discretionary authority. Hamermesh & Sparks, supra note 139, at 876; see also Model Bus. Corp. Act § 8.42 official cmt. at 197 (Am. Bar Ass’n 2016) (stating that the business judgment rule will apply to actions taken by officers as part of their discretionary authority). While this model takes into account the different rights and authority of the board (full managerial authority) versus the officers (delegated managerial authority), it does not account for officers who are more akin to rank-and-file employees and, as such, do not implicate the policy rationales for the rule.

Federal securities laws and the ALI’s Principles of Corporate Governance (“ALI Principles”) are instructive in this regard. Both federal securities law and the ALI Principles recognize in their provisions that there are different ranks of officers within the corporate enterprise and that legal obligations should be tailored accordingly.168See Shaner, supra note 95, at 544–45, 549–50 (discussing the different definitions of “officer” in the law). For example, rules promulgated under the Securities and Exchange Acts of 1933 and 1934 define “officer” broadly, but then further define a subset of officers—“executive officers”—that have heightened responsibilities and liabilities.169“Officer” is defined as “a president, vice president, secretary, treasury or principal financial officer, comptroller or principal accounting officer, and any person routinely performing corresponding functions with respect to any organization whether incorporated or unincorporated.” 17 C.F.R. § 240.3b-2 (2020); see 17 C.F.R. § 230.405 (2020) (containing the same general definition of “officer” for purposes of the 1933 Act). “Executive officer” is defined as a “president, any vice president of the registrant in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant.” 17 C.F.R. § 240.3b-7 (2020); see 17 C.F.R. § 230.501(f) (2020) (containing the definitional section for “executive officer” relating to unregistered sales made pursuant to Regulation D). The ALI Principles similarly identify different tiers of officers in its definitional provisions—“officers,” “senior executives,” and “principal senior executives”—which then implicate different legal rights and obligations.170See ALI Principles, supra note 139, §§ 1.27, 1.33, 3.01, cmt. c. The differentiation in legal obligations stems from the recognition that not all officers are alike: some individuals are officers in title only, while others are vested with director-like management authority; each should be held accountable according to his or her role.171See, e.g., Ownership Reports and Trading by Officers, Directors and Principal Stockholders, 53 Fed. Reg. at 50,000 (“[O]f particular concern is the inclusion of all vice presidents in the definition [of “officer” and that] [m]any businesses give the title of vice president to employees who do not have significant managerial or policymaking duties and are not privy to inside information.” (footnote omitted)); see also Shaner, supra note 95, at 544–45, 549–50.

Tailoring the application of the business judgment rule to the type of officer in a fashion similar to that employed by the ALI or in securities laws—whether through private ordering, state statutes, or case law—strikes a balance between the competing concerns raised in the literature. Differentiating officers’ roles and responsibilities allows identification of those corporate actors whose risk-taking and business decision-making are in line with the policies animating the business judgment rule and thus deserve judicial deference. Applying the business judgment rule only to senior executives would then align more closely with the expectations of the parties—boards, officers, and stockholders—because deference would be limited to those individuals who are truly exercising director-like authority. Moreover, fashioning the business judgment rule in this manner would be consistent with efforts in other areas of corporate law to distinguish the roles and responsibilities of officers from those of directors.172See, e.g., DeMott, supra note 92, at 848; Johnson & Ricca, supra note 5, at 683; Stephen P. Lamb & Joseph Christensen, Duty Follows Function: Two Approaches to Curing the Mismatch Between the Fiduciary Duties and Potential Personal Liability of Corporate Officers, 26 Notre Dame J.L. Ethics & Pub. Pol’y 45, 65–71 (2012); Shaner, supra note 5, at 101–05; Shaner, supra note 1, at 332–36; Shaner, supra note 2, at 273–76.

Lastly, as is the case with contractually structuring fiduciary duties, reducing the business judgment rule to words will be an arduous task. Indeed, the ABA Corporate Laws Committee, charged with drafting the MBCA and comprised of some of the top lawyers, judges, and academics in corporate law, has been unable to articulate the rule in statute.173See Model Bus. Corp. Act. § 8.31 official cmt. at 189 (Am. Bar Ass’n 2016) (“The elements of the business judgment rule and the circumstances for its application continue to be developed and refined by courts. Accordingly, it would not be desirable to freeze the concept in a statute.”); Bayless Manning, The Business Judgment Rule and the Director’s Duty of Attention: Time for Reality, 39 Bus. Law. 1477, 1478–80 (1984) (describing the efforts of the ABA’s Committee on Corporate Laws to grapple with and articulate the elements of the business judgment rule, which spanned multiple years and revisions to the Model Act but in the end resulted in no new language). Using private ordering means to clarify an area of that law that is described as one “of the great puzzles” of American corporate law174Kent Greenfield & John E. Nilsson, Gradgrind’s Education: Using Dickens and Aristotle to Understand (and Replace?) the Business Judgment Rule, 63 Brook. L. Rev. 799, 816 (1997). The confusion surrounding the business judgment rule is evident in the variety of (sometimes contradictory) ways that courts have articulated the rule, the voluminous academic literature on the subject, and the debate that has accompanied the business judgment rule and its application to directors over the years. See Johnson, supra note 137, at 454–55 (“There exists, to be sure, deep-rooted disagreement about the basic purpose and thrust of the business judgment rule.”); see generally Stephen A. Radin, 1 The Business Judgment Rule: Fiduciary Duties of Corporate Directors (6th ed. 2009); Arsht, supra note 85; Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L. Rev. 83 (2004); R. Franklin Balotti & James J. Hanks, Jr., Rejudging the Business Judgment Rule, 48 Bus. Law. 1337 (1993); Douglas M. Branson, The Rule That Isn’t a Rule – The Business Judgment Rule, 36 Val. U. L. Rev. 631 (2002); Stuart R. Cohn, Demise of the Director’s Duty of Care: Judicial Avoidance of Standards and Sanctions Through the Business Judgment Rule, 62 Tex. L. Rev. 591 (1983); Kenneth B. Davis, Jr., Once More, The Business Judgment Rule, 2000 Wis. L. Rev. 573; Franklin A. Gevurtz, The Business Judgment Rule: Meaningless Verbiage or Misguided Notion?, 67 S. Cal. L. Rev. 287 (1994); Lyman Johnson, The Modest Business Judgment Rule, 55 Bus. Law. 625 (2000); Manning, supra note 173. and “one of the least understood concepts in the entire corporate field”175Henry G. Manne, Our Two Corporation Systems: Law and Economics, 53 Va. L. Rev. 259, 270 (1967). may, in the end, create only more uncertainty and litigation, not less. Private ordering’s utility may, in reality, be greatly outweighed by the ex ante transaction costs and ex post litigation costs.176Professor Elizabeth Miller and attorney Tom Rutledge discuss a further issue complicating private ordering in this area—how the business judgment rule operates in a contract law environment (e.g., where an entity has contractually structured fiduciary duties). See Miller & Rutledge, supra note 146, at 379–87. As their analysis reveals, the answer is complicated.

IV.     A Normative Evaluation of Private Ordering

Setting aside the issue of whether contractually arranging officer duties and liabilities within the confines of current positive law is viable, the normative question remains: Should corporations be able to individually select the rules that will govern their officers’ conduct? In many respects the Task Force’s proposal serves merely as the latest iteration of a debate that has long-plagued corporate law discourse—Are the corporation and the rules and regulations that govern it purely creatures of contract or are they something broader?177For discussions of the contractual nature of the corporation, see Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 12–14 (1991); Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians, 65 Wash. L. Rev. 1, 7–8 (1990); R. H. Coase, The Nature of the Firm: Meaning, 4 J.L. Econ. & Org. 19, 28–29 (1988); Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. & Econ. 425, 425–28 (1993); Richard A. Epstein, Contract and Trust in Corporate Law: The Case of Corporate Opportunity, 21 Del. J. Corp. L. 5, 7 (1996); Oliver Hart, An Economist’s Perspective on the Theory of the Firm, 89 Colum. L. Rev. 1757, 1763–65 (1989); Larry E. Ribstein, Fiduciary Duty Contracts in Unincorporated Firms, 54 Wash. & Lee L. Rev. 537, 538 (1997) [hereinafter Ribstein, Fiduciary Duty Contracts]. For discussions of the corporation from the anti-contractarian viewpoint, see Cox, supra note 23, at 291 (“Corporations act through contracts, but they are not contracts.”); E. Merrick Dodd, Jr., For Whom Are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145, 1148 (1932); Lyman Johnson, The Delaware Judiciary and the Meaning of Corporate Life and Corporate Law, 68 Tex. L. Rev. 865, 934 (1990); David Millon, Theories of the Corporation, 1990 Duke L.J. 201, 202; Lawrence E. Mitchell, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579, 640 (1992). This Part addresses these questions by examining the dual private-public nature of the corporation and the role of fiduciary duties in incentivizing desirable corporate behavior. It then follows by considering the implications of privately ordering officer duties on the governance of corporate behavior, focusing on the effect of private ordering on: (1) the role of stockholders in holding officers accountable; (2) the role of the courts in policing officer behavior; and (3) the role of markets and norms on influencing officer conduct.

A.     The Private-Public Nature of the Corporation and the Importance of Fiduciary Duties

Proponents of the nexus of contracts theory view the corporation as a collection of contractual relationships;178“The nexus of contracts theory, generally attributed to Jensen and Meckling’s Theory of the Firm, holds that the firm—and by extension the corporation—is merely a central hub for a series of contractual relationships.” See Grant M. Hayden & Matthew T. Bodie, The Uncorporaiton and the Unvraveling of “Nexus of Contracts” Theory, 109 Mich. L. Rev. 1127, 1129 (2011). they view the duties imposed on corporate actors, including fiduciary duties, as “simply a species of contract,”179Ribstein, Fiduciary Duty Contracts, supra note 177, at 538; see Easterbrook & Fischel, supra note 177, at 14; Butler & Ribstein, supra note 177, at 4; Easterbrook & Fischel, supra note 177, at 446; Epstein, supra note 177, at 10–13; cf. Rauterberg & Talley, supra note 88, at 1077 & n.8 (arguing that the ability to waive corporate opportunity claims means the duty of loyalty is no longer mandatory). in effect, a creature of private law. Traditional corporate scholars, on the other hand, view fiduciary duties as mandatory constraints emanating from the trust-like relationship that exists between stockholders and management.180See Bebchuk & Hamdani, supra note 88, at 496 n.16 (citing “the duty of loyalty of corporate directors” as a mandatory aspect of corporate law); Black, supra note 53, at 551–53; Eisenberg, supra note 88, at 1486 (self-dealing rules “are largely mandatory, at least for publicly held corporations”); Gordon, supra note 53, at 1550–52 (arguing that envisioning the corporation as merely a vehicle for wealth maximization is too narrow a view that ignores the multiple other contributions that flow from society’s authorizing its existence); Kahan, supra note 88, at 607 & n.164; Thomas, supra note 88, at 139. This entity conception of the corporation situates the corporation’s role in the broader context of social and political values, and thus corporate law is public, not private, law.181See Millon, supra note 177, at 202; see also Helen Hershkoff & Marcel Kahan, Forum-Selection Provisions in Corporate “Contracts, 93 Wash. L. Rev. 265, 268 (2018) (“But a corporation’s charter and bylaws are no ordinary contracts. Rather, they are hybrid legal structures that provide a mechanism for collective choice in the context of substantial state regulation and straddle the public-private divide in ways that make them quite dissimilar from ordinary contracts.”). Allowing the private ordering of officers—central figures in corporate governance—would reinforce the nexus of contracts theory of the firm in corporate doctrine while weakening an entity conception of the corporation and corporate relations in a way that could undermine beneficial societal conventions.

In their exercise of power, managers—whether they are directors, officers, or certain controlling stockholders—are held to certain fiduciary standards. These fiduciary obligations do not arise as a matter of contract,182See Cox & Hazen, supra note 166, § 3:11 (stating that fiduciary duties are owed “not [as] a matter of contract”); see also Cox, supra note 23, at 291 (“Corporations act through contracts, but they are not contracts.”). but out of public policy. Serving as a way to protect investors who entrust vast amounts of capital to centralized management, fiduciary duties find their legal roots in broader social welfare and relational considerations not present in contract law.183See Cox & Hazen, supra note 166, § 3:11 (“[T]he fiduciary obligations of the controlling shareholders, and even officers and directors, have a richer basis than as a consensual bond among the corporation’s participants.”); Chandler & Strine, supra note 10, at 993; Cox, supra note 23, at 267–68 (“Nonetheless, where a fiduciary relationship exists, it exists not because of an agreement to be fiduciaries but because public policy considerations impart to the parties fiduciary-based rights and obligations. This truly transcends private ordering.”). As explained by former Delaware Supreme Court Chief Justice Myron Steele, “[w]e, as a society, encourage corporate investment, which is ‘socially desirable, but vulnerable,’ by designing a liability framework that (1) incentivizes fiduciary conduct on terms with which investors can relate and (2) proves itself an effective protector of investor interests.”184Steele, supra note 1, at 22. And “[w]ithout the ability to create their own remedies or protective devices, shareholders must depend on courts to enforce fiduciary duties to make directors and officers, entrusted with shareholder property, walk the proverbial ‘straight and narrow.’”185Id.

Even staunch proponents of the contractual theory of the firm recognize that the role of fiduciary duties within the corporate enterprise may be different than their contractually based counterparts in unincorporated business entities.186See Ribstein, Fiduciary Duty Contracts, supra note 177, at 539–40. Certain mandatory rules, such as fiduciary duties, exist because of the unique relationships created in the corporate structure. Corporate law’s enshrinement of the relationship between managers and stockholders as fiduciary in character requires actors to conduct themselves in an “‘other-regarding way’ consistent with duties of care and loyalty.”187Cox, supra note 23, at 268–69 (emphasis omitted). Indeed, the courts point to the imposition of fiduciary duties as a key factor that distinguishes business entities from long-term relational contracting.188The oft cited language from Meinhard v. Salmon illustrates the point: “Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate.” 164 N.E. 545, 546 (N.Y. 1928). Fiduciary duties serve as a critical mechanism for policing opportunistic and inept conduct by management and protecting the interests of stockholders and the corporate enterprise.189See Cox, supra note 23, at 280–81. In this way, fiduciary duties legitimize the corporate endeavor and its separation of ownership from control. By permitting private agreements between corporations and officers, private ordering may undermine the social welfare and protection policies that underlie public policy motivations giving rise to managerial fiduciary duties.

Corporate law plays a pivotal role in our economic system.190See Kent Greenfield, There’s a Forest in Those Trees: Teaching About the Role of Corporations in Society, 34 Ga. L. Rev. 1011, 1017 (2000). In addition to stockholders, large corporations (both private and publicly traded) have a significant impact on constituencies including employees, creditors, customers, and local communities.191See Corporate Governance: Law, Theory and Policy 3 (Thomas W. Joo ed., 2d ed. 2010). Even in a monitoring age of corporate governance, CEOs and senior executive officers, not boards of directors, run these corporations.192See Lawrence E. Mitchell, On the Direct Election of CEOs, 32 Ohio N. U. L. Rev. 261, 270 (2006) (“It proves exactly what we’ve known all along: corporations are managed by their executives, not by their boards.”); Robert B. Thompson & Hillary A. Sale, Securities Fraud as Corporate Governance: Reflections upon Federalism, 56 Vand. L. Rev. 859, 864 (2003) (“In reality, officers exercise the most important corporate powers . . . .”); Jens Dammann, How Embattled Are U.S. CEOs?, 88 Tex. L. Rev. 201, 201 (2009) (“What both sides agree upon, though, is that U.S. managers are in fact quite powerful, especially by international standards.”); see also ABA Report, supra note 2, at 128 (“Throughout much of the last century, the professional managers hired to run public companies have wielded significant power in relation to both the board of directors and shareholders.”). But see Kahan & Rock, supra note 9, at 989 (“The CEOs of publicly held corporations in the United States are losing power.”). Accepting the reality of corporate managerialism has profound consequences for private ordering in this space. As Professor Lawrence Mitchell writes: “Absolute power corrupts absolutely. It would probably be a bad idea, and completely inconsistent with the structures legitimating the modern corporation, to permit CEOs to run corporations unchecked.”193Mitchell, supra note 192, at 263; see Johnson, supra note 16, at 199 (“The stakes for the company and its stockholders are simply too high to permit reckless conduct by senior managers.”). Fiduciary duties combat both traditional agency problems such as opportunism and shirking, as well as, albeit to a lesser degree, managerial behaviors such as overconfidence and bias.194See Troy A. Paredes, Too Much Pay, Too Much Deference: Behavioral Corporate Finance, CEOs, and Corporate Governance, 32 Fla. St. U. L. Rev. 673, 748–49 (2005). In an age where other checks on managerial power, like market pressures, stockholder election and removal, and stockholder litigation, are absent or severely restricted, there is added pressure on fiduciary duties to maintain officer accountability.195See Gorman v. Salamone, C.A. No. 10183-VCN, 2015 WL 4719681, at *4–5 (Del. Ch. July 31, 2015) (holding that the power to remove officers resides with the board, not the stockholders); see also Klaassen v. Allegro Dev. Corp., C.A. No. 8626-VCL, 2013 WL 5967028, at *15 (Del. Ch. Nov. 7, 2013) (“Often it is said that a board’s most important task is to hire, monitor, and fire the CEO.”); Douglas G. Baird & Robert K. Rasmussen, The Prime Directive, 75 U. Cin. L. Rev. 921, 923 (2007); Melvin Aron Eisenberg, Legal Models of Management Structure in the Modern Corporation: Officers, Directors, and Accountants, 63 Calif. L. Rev. 375, 403 (1975); Usha Rodrigues, A Conflict Primacy Model of the Public Board, 2013 U. Ill. L. Rev. 1051, 1073–74.

In addition, fiduciary duties have the potential to be more impactful in incentivizing optimal corporate decision-making at the officer, rather than board, level. Professor Mitchell stated:

[W]hen the board fails, it fails as an institution and not as individuals. The board itself may be held accountable, but the individuals who comprise it are relatively immune . . . The CEO presents a different story. The CEO is an identifiable, known individual . . . [I]dentifying the CEO as the figure to bear the brunt of corporate accountability will instill in the CEO the kind of sense of responsibility that will help to ensure the best kind of corporate decisionmaking . . . .196Mitchell, supra note 192, at 273–74.

The dangers in allowing officers to limit or eliminate the fiduciary obligations corporate law imposes are great. Professor Kent Greenfield cautions that corporate scholars, judges, and legislators should also keep in mind the corporation’s position within society at large when crafting corporate governance rules: “while the corporation is a hugely important and successful engine of wealth creation, it can also be an amoral behemoth that fouls the environment, worsens political inequalities, and takes advantage of horrible injustices for its own financial gain.”197Greenfield, supra note 190, at 1013.

In the modern American corporation, it is the executive officers who are at the helm of these behemoths. The impact of their decision-making is not limited to a corporation’s financial returns but reaches its workforce, consumer base, community, the environment, and markets worldwide. Officer misconduct was identified as a contributing—if not leading—factor in all of the following disasters: the Gulf of Mexico oil spill,198See Helen Kennedy, BP’s CEO Tony Hayward: The Most Hated—and Most Clueless—Man in America, N.Y. Daily News (June 2, 2010, 11:26 PM), the widespread financial fraud in the early 2000s,199See Kathleen F. Brickey, From Enron to WorldCom and Beyond: Life and Crime After Sarbanes-Oxley, 81 Wash. U. L.Q. 357, 358 (2003) (discussing corporate misconduct at Enron, WorldCom, and Adelphia and noting that “[t]o date, some ninety corporate owners, executives, and employees have been criminally charged, and the investigations are ongoing”); Lyman P.Q. Johnson & Mark A. Sides, The Sarbanes-Oxley Act and Fiduciary Duties, 30 Wm. Mitchell L. Rev. 1149, 1219 (2004) (“Much of the recent corporate wrongdoing involves senior officers, many of whom . . . were not members of the board.” (footnote omitted)); Joseph E. Murphy, Can the Scandals Teach Us Anything? Enron, Ethics and Lessons for Lawyers, Bus. L. Today, Jan./Feb. 2003, at 11 (noting that the corporate scandals at Adelphia, Tyco, ImClone, and WorldCom did not involve rogue employees, rather high-profile corporate executives played a role). the global financial crisis in 2008,200See, e.g., In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 111 (Del. Ch. 2009) (addressing claims against directors and officers arising out of corporation’s exposure to the subprime lending market as a result of high-risk investments); Am. Int’l Grp., Inc. v. Greenberg, 965 A.2d 763, 774 (Del. Ch. 2009) (addressing claims against directors and officers where stockholder plaintiffs sought to recover funds to make AIG “whole for harm it suffered when it was revealed that the corporation’s financial statements were materially misleading and overstated the value of the corporation”). and Massey Energy’s Big Branch mine explosion.201See Claire Zillman, Ex-Massey CEO Faces Criminal Trial for Fatal Mine Explosion: A First in Coal Country, Fortune (Sept. 30, 2015, 1:44 PM), More recently, the near implosion of WeWork, a unicorn startup valued at nearly $50 billion, was attributed to its former CEO and founder’s conduct and the company’s poor corporate governance structure.202See Rani Molla & Shirin Ghaffary, The WeWork Mess, Explained, Vox (Oct. 22, 2019, 12:51 PM), (reporting that the bailout of WeWork valued the company at a mere $8 billion); Derek Thompson, WeWork and the Great Unicorn Delusion, The Atlantic (Sept. 20, 2019), The fallout from this single officer’s erratic, self-interested, and sometimes illegal, behavior and management left WeWork valued at a mere fraction of its original valuation and resulted in a layoff of a large portion of its workforce.203See Molla & Ghaffary, supra note 202. WeWork is estimated to have laid off around one-third of its workforce. Id. As these examples illustrate, there are significant externalities that flow from officer misconduct and poor governance structures. Ensuring officer fidelity to principles of good faith, loyalty, and care, is thus critical. To the extent that private ordering allows corporations and officers to contract around these basic principles, it may weaken options for strong corporate oversight that can prevent these types of disasters.

In sum, because of the potentially significant, widespread consequences, allowing officers’ fiduciary obligations to be mutable should not be taken lightly. Indeed, in the officer-dominated corporate structure, one could argue that fiduciary duties should be beyond private ordering except pursuant to explicit statutory authority.204And even then, prudent statutes would only allow modification, not elimination, of fiduciary obligations, similar to what is permitted in the uniform acts for unincorporated business entities. See, e.g., Unif. P’ship Act § 105(c)(4)–(6), (d) (Unif. L. Comm’n 2013). This argument aligns with Professor Fisch’s position on proposed limitations for private ordering in shareholder agreements. Fisch, supra note 31 (manuscript at 7). As Professor Fisch explains: Delaware has consistently taken this approach, amending the statute to authorize private ordering in respond [sic] to evolving business needs through legislation authorizing, for example, proxy access bylaws, waivers of the corporate opportunity doctrine, and forum selection bylaws. Notably, the legislature is particularly well suited to weigh the public policy considerations associated with retaining or eliminating a mandatory feature of the law. Id. at 10 (footnote omitted). Alternatively, to the extent that the courts continue to endorse private ordering and allow corporations to tailor officer duties via contract, such provisions should be subject to the type of heightened judicial scrutiny based on the Unocal Corp. v. Mesa Petroleum Co.205493 A.2d 946, 954–55 (Del. 1985). decision, as proposed by Professor Fisch.206Fisch, supra note 43, at 403–08 (proposing an intermediate level of judicial scrutiny for board-adopted governance bylaws based on the approach developed in Delaware’s Unocal decision). Professor Fisch proposes analyzing a bylaw that is unilaterally adopted by a board in the following manner: First, the court would consider whether the board reasonably believed that the provision was necessary to address a threat to the corporation. Second, the court would determine whether the provision was a proportional response to that threat. If the governance provision meets these standards, the court would uphold its adoption. Id. at 404.

B.     The Impact of Private Ordering on the Governance of Corporate Behavior

Private ordering of officer duties and liabilities has implications, not only for corporate conventions, but also for the ability of corporate and societal actors to enforce and ensure responsible corporate behavior. The remainder of this Section assumes the enforceability of privately ordered officer duties and discusses the impact of private ordering on the role of stockholders, courts, and markets in corporate governance.

1.     The Role of Stockholders

Under current corporate doctrine—without the overlay of private ordering—stockholders are significantly constrained in their ability to reduce agency costs and hold officers accountable. The courts have made clear that stockholders lack the power to remove officers.207See Gorman v. Salamone, C.A. No. 10183-VCN, 2015 WL 4719681, at *5 (Del. Ch. July 31, 2015) (holding that stockholders cannot remove officers). And while bylaws often provide for officer appointments and processes for filling vacancies, stockholders’ power to amend the bylaws with the aim of impacting the corporation’s governance is limited, making bylaw amendments an unlikely avenue for stockholders to regulate officer conduct.208See Fisch, supra note 43, at 376–77; see also CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 239 (Del. 2008) (en banc) (holding that stockholders’ statutory authority to adopt bylaws is limited by the board’s statutory managerial authority); Gorman, 2015 WL 4719681, at *5 (holding that stockholders cannot adopt a bylaw allowing for removal of officers as removal is a task that falls under the board’s managerial purview); Klaassen v. Allegro Dev. Corp., C.A. No. 8626-VCL, 2013 WL 5967028, at *15 (Del. Ch. Nov. 7, 2013). At best, then, stockholders can indirectly influence the oversight and accountability of officers via their rights to elect and remove directors and sell their shares (i.e., voting with their feet). These are, however, theoretical checks on management. Scholars have repeatedly found that, in practice, these tactics have very little impact on the board and its decision-making.209See Fisch, supra note 43, at 393–97.

In light of the foregoing, litigation rights are the only viable option for stockholders to ensure managerial accountability.210See Reinier Kraakman, Hyun Park & Steven Shavell, When Are Shareholder Suits in Shareholder Interests?, 82 Geo. L.J. 1733, 1733 (1994) (“[Stock]holder suits are the primary mechanism for enforcing the fiduciary duties of corporate managers.”); Shaner, supra note 15, at 363, 369, 384. Privately ordering officer fiduciary duties could, however, severely limit stockholders’ ability to sue. To the extent that officer duties are modified via private contract, stockholders would generally lack standing to enforce those contractual duties.211This is because the board, under its broad managerial authority, and not the stockholders, is vested with the right to pursue litigation and legal claims on behalf of the corporation. See Del. C. Ann. tit. 8, § 141(a) (2020); Charles R.T. O’Kelley & Robert B. Thompson, Corporations and Other Business Associations: Cases and Materials 398 (6th ed. 2010) (“Directors are responsible for managing the corporation, and this responsibility normally includes determining when litigation is in the corporation’s best interest.”). The exception would be if stockholders were able to style such claims as derivative in nature. However, derivative claims would be subject to the same business judgment rule deference difficulties as direct claims. Furthermore, if stockholders sought to hold the board accountable for binding the corporation to unfavorable fiduciary modifications (be it in a contract or the bylaws) or for failing to enforce an officer’s contractual fiduciary duties, the board would be protected by the deferential business judgment rule, making successful litigation challenging.212As scholars have repeatedly found, the high procedural hurdles surrounding derivative litigation, coupled with the protective presumptions of the business judgment rule, make fiduciary litigation incredibly difficult to pursue. See Shaner, supra note 2, at 325–26 (describing the challenges for stockholders in pursuing derivative litigation); see also Del. Ch. Ct. R. 23.1. Litigation of this sort would generally be derivative in nature as the alleged harm would be to the corporation and not to the stockholders individually. See Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004) (en banc). In sum, with private ordering, all of stockholders’ traditional governance powers—vote, sell, and sue—could be relatively useless with respect to the ability to influence officers.

The result of private ordering is that officers would be insulated from any meaningful accountability by stockholders.213Scholars have commented that Delaware jurisprudence is already moving in this direction—viewing officers, for legal purposes, through a director-centric lens. See Johnson, supra note 16, at 193 (“[W]e don’t legally ‘see’ the officer aspect of Delaware law because our observation is clouded by the more conspicuous director-primacy aspect of Delaware law that stands in the forefront.”); Shaner, supra note 1, at 343 (“Perhaps as an unintended consequence, the breadth of Section 141(a)’s language, the power it bestows on boards of directors, and the dedication with which courts protect board authority and primacy from stockholder encroachment, have insulated officers from meaningful stockholder oversight and discipline.” (footnote omitted)). Given the capture phenomenon documented between the board and senior executive officers,214See Charles M. Elson, Director Compensation and the Management-Captured Board—The History of a Symptom and a Cure, 50 SMU L. Rev. 127, 157 (1996); Mitchell, supra note 192, at 267; Shaner, supra note 13, at 28; see also Stephen M. Bainbridge, Rethinking the Board of Directors: Getting Outside the Box, 74 Bus. Law. 285, 286 (2019) (describing the inability of the board to monitor given its part-time role, informational asymmetry vis-à-vis officers, and deference to the CEO); Brian R. Cheffins, Delaware and the Transformation of Corporate Governance, 40 Del. J. Corp. L. 1, 7 (2015) (“U.S. corporate governance may have been transformed over the past four decades but this occurred without a major change to the formal allocation of power and responsibility within corporations.”). But see Kahan & Rock, supra note 9, at 1051 (asserting that executive officers are losing power). further reductions in stockholders’ ability to hold officers accountable is problematic and runs counter to the governance system traditionally envisioned for the corporate form.215See Lebovitch & van Kwawegen, supra note 5, at 500–01 (“[T]he Delaware Supreme Court has expressly affirmed the importance of the stockholders’ right to hold fiduciaries accountable through litigation, stating that ‘[t]he machinery of corporate democracy and the derivative suit are potent tools to redress the conduct of a torpid and unfaithful management.’” (quoting Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993))). Moreover, contractarian scholars’ characterization of fiduciary duties as a contractual “hypothetical bargain,” such that parties may “substitute other constraints on the fiduciary’s conduct, including compensation, exit, and control rules” in place of fiduciary duties, assumes actual negotiation over such terms between the board and potential or current officers.216See Ribstein, Fiduciary Duty Contracts, supra note 177, at 542–44. As revealed in the context of executive compensation packages, such arm’s length negotiation does not always occur.217See Lucian Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation 80, 82 (2004); Randall S. Thomas & Harwell Wells, Executive Compensation in the Courts: Board Capture, Optimal Contracting, and Officers’ Fiduciary Duties, 95 Minn. L. Rev. 846, 852 (2011) (describing the board capture theory: “Weak boards, and more particularly weak compensation committees, do little to protect firms in their pay negotiations with officers.”). But see John E. Core, Wayne R. Guay & Randall S. Thomas, Is U.S. CEO Compensation Inefficient Pay Without Performance?, 103 Mich. L. Rev. 1142, 1160–61 (2005) (contending that boards are negotiating the best possible executive compensation packages); John E. Core & Wayne R. Guay, Is There a Case for Regulating Executive Pay in the Financial Services Industry?, 3–4, 15–19 (Jan. 25, 2010) (unpublished manuscript), The power imbalance that exists between the board and officers makes preserving stockholder oversight and accountability that much more critical.

2.     The Role of the Courts

Corporate law places great weight on the concept of fiduciary duties, vesting power in the courts, as the keepers of those duties, to set, maintain, and enforce the standards of conduct expected of managers.218See Shaner, supra note 1, at 345. To the extent that officer fiduciary duties become the subject of private ordering, their nature would shift from mandatory to enabling, which results in a key tradeoff:

[T]o the extent that American courts have permitted greater contractual freedom in corporate law, their relative tolerance has been coupled with greater judicial activism in reading implied terms into the corporate contract and in monitoring for opportunism. Thus, the issue of contractual freedom is inextricably entangled with the issue of institutional competence. Do we rely on prophylactic rules allowing little or no departure from the statutory baseline? Or do we counterbalance contractual freedom with ex post judicial review?219Coffee, supra note 53, at 1618, 1620–21; see Cox, supra note 23, at 260 n.11 (“If courts are to be drawn into mediating the extent to which private ordering prevails within business organizations, this necessarily raises concerns regarding whether the court has the institutional competence to fully evaluate the social implications of attempted departures from statutory norms, particularly in the complex setting of the public corporation.”).

In an era of private ordering, pressure may be placed on the courts to evaluate fiduciary modifications, limitations, or eliminations ex post for fairness. Courts will have to figure out the proper interpretative framework and standard of review for evaluating such corporate contracting—contract law, corporate law, or both.220Cf. Jack B. Jacobs, Entity Rationalization: A Judge’s Perspective, 58 Bus. Law. 1043, 1045 (2003) (“[I]n an alternative entity governance case, courts must in effect ‘start all over again,’ by engaging in a predicate analysis of what principles—contract law, fiduciary law, or some combination of both—will be the source of law for deciding the substantive issue for the entity in question.”). For a proposed framework for evaluating private ordering in corporate organizational documents, see Shaner, supra note 25, at 1017–40. Resolving the threshold question of what legal principles govern will have important implications for tough questions like: Who is the “contract” between, and thus who has enforcement rights—the corporation, stockholders, board, or officers? What third party beneficiary rights, if any, arise from private ordering? How should individuals who occupy dual director-officer status within the corporation be analyzed?

Relatedly, courts will have to tackle the complicated scenarios where standards of conduct are privately ordered but standards of review are not (and vice versa)—a challenge that has yet to be fully resolved in the unincorporated entity context.221See Miller & Rutledge, supra note 146, at 379–87 (discussing the business judgment rule in the context of unincorporated business entity where the entities, including fiduciary obligations, are largely creatures of contract). As former Vice Chancellor of the Delaware Court of Chancery Jack Jacobs explained, confronting the challenges of resolving conflicts in private contractual ordering in alternative entity forms required the court “to develop a new legal epistemology—a way of thinking, if you will—about how to approach . . . fundamental issues that in the conventional corporate law world had long been settled.”222Jacobs, supra note 220, at 1043–44. Similarly, private ordering officer duties may necessitate the court to decide fiduciary duty issues afresh through a hybrid lens of contract and corporate law.

In some cases, however, private ordering may take the courts entirely out of the officer fiduciary equation. Boards of directors may choose to discipline disloyal officers internally or include alternative dispute resolution mechanisms in corporate contracts to avoid messy, public litigation. The efficiencies of private adjudication, however, come at a cost. As Professor Fisch explains, judicial resolution of private ordering (especially in organizational documents) has important benefits by “facilitat[ing] the transparency of governance innovation, lead[ing] to clarification of the law and permit[ing] the spread of provisions that have the potential to enhance corporate value or facilitate their operations.”223Fisch, supra note 31 (manuscript at 51). As boards increasingly handle contractual fiduciary matters privately, courts may have fewer opportunities to weigh in on officer duties and the questions raised above. Moreover, in contrast to public litigation, private adjudication of fiduciary disputes will decrease the legal and reputational deterrent effects of liability for fiduciary breaches at the individual firm level, and potentially across corporate America, as well.

3.     The Role of Markets and Norms

Generally, fiduciary duty issues are, by their very nature, complicated legal controversies that are highly dependent on factual context. Allowing fiduciary duties to be privately ordered will layer complex contract interpretation questions on top of the already highly contextual nature of fiduciary duty analysis. Such a result is bound to further muddy fiduciary doctrine. Questions surrounding privately ordered fiduciary duties are likely to result in courts drawing fine-grained distinctions between fiduciary duty variants that stem from creative lawyering, further complicating this area of law. Officer fiduciary duty cases will hinge on the specific tailoring of such duties in organizational documents or other contractual provisions, thereby stratifying officer fiduciary doctrine in a way that undermines the broader expressive and deterrent functions of corporate law.224See also Strine & Laster, supra note 48, at 12 (“[U]nique provisions that lead to ad hoc judicial decisions interpreting specific provisions . . . provide no predictability in future cases . . . .”). The result is that officer fiduciary duties will not be fungible across corporate America (or even within a corporation) in the same way that directorial fiduciary duties are.225See id. at 12–13. “Corporate manag[ers], investors, regulators, banks, capital markets, and other groups are sensitive to corporate governance practices and the courts’ enforcement [of], interpretation [of], and general commentary on those practices.”226Shaner, supra note 25, at 1040; see Smith et al., supra note 20, at 170–71. To the extent that fiduciary duties have systemic importance to capital markets and corporate governance expectations, that importance will be undermined by private ordering in this space.

Moreover, while corporate law describes fiduciary duties as running from officers to the corporation and its stockholders,227See Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (en banc). it would be narrow—indeed naïve and unrealistic—to think that the benefits that flow from these legal obligations are so limited. Fiduciary duty jurisprudence supports and interacts with social norms to reinforce proper managerial behavior.228See Melvin A. Eisenberg, Corporate Law and Social Norms, 99 Colum. L. Rev. 1253, 1265–78 (1999); Rock, supra note 86, at 1017.

The norms that flow from litigation’s enforcing fiduciary standards strengthen sensible management of firms and thus contribute to increased economic activity. The norms themselves shape best practices and in that way reduce agency costs as well as uncertainty. Each in turn yields a public benefit. Fiduciary duties, therefore, are hardly private, as they yield important externalities—their enforcement not only compensates those injured by misconduct, but also promotes investment by establishing investor-friendly norms to which managers must conform.229Cox, supra note 23, at 280–81.

In a private ordering world, however, questions of fiduciary duties will shift in an important way from majoritarian to tailored legal analyses. Discussions about community expectations and ideals of proper managerial behavior and fidelity to fiduciary principles will be replaced with inquiries focused on the actual intentions of the specific parties at hand and the specific language used. This will occur without regard to the broader moral ideas underlying fiduciary relationships that have historically separated business entities from contractual relationships, and which have had such a foundational effect on the formation of corporate law.230See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928).


In the wake of decades of judicial and legislative silence on the issue, an ABA Task Force has sought to remedy the uncertainty regarding fiduciary duties that plagues corporate officers. The principal tool at their disposal is private ordering, whether in private contracts or through bylaw or charter provisions. The Task Force’s proposal moves private ordering to a domain that has largely been untouched—substantive corporate law principles. As a result, it raises important questions regarding the scope of private ordering in the corporation and the normative consequences of allowing officer fiduciary duties and liability to become a creature of contract.

Considering how such contracting would be structured exposes the complexities and uncertainties regarding fiduciary doctrine in the corporate governance structure. Contractual efforts in this area of the law will merely mask the underlying officer doctrine problem and perhaps even exacerbate the problem as decisions in this area will be case specific, interpreting tailored provisions that provide no predictability for future cases. This is a stark departure from the more traditional common law development of fiduciary doctrine that, over time, yields reasonably determinative guidelines for fiduciaries’ roles and duties. A closer look at the viability and drafting of contractual fiduciary obligations and the business judgment rule reveal that while the Task Force’s private ordering solution is characterized as remedying the uncertainty surrounding officers, it may well have the opposite effect.

Allowing private ordering with respect to officers—central figures in corporate governance—has important economic, societal, and normative consequences. In an officer-dominated environment, as presently exists in many organizations, there are significant externalities that flow from officer misconduct, harming not just capital markets, but labor markets, customers, and the environment. Expanding private ordering into the realm of officer fiduciary duties raises important issues regarding accountability, deterrence, and responsibility. Moreover, how officer duties are addressed by courts, commentators, and legislators will have important consequences if other corporate fiduciaries, like controlling stockholders, seek to privately order their legal duties.

In sum, while private ordering may address some of the uncertainties in the undertheorized area of corporate officer fiduciary duties, it raises many new concerns, and may not, ultimately, provide the clarity the ABA Task Force seeks. Corporations—their boards, officers, and stockholders—would be wise to move slowly to ensure that their private ordering efforts do not create more problems than they resolve.

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