Director Communications and the Uneasy Relationship Between the Fiduciary Duty of Disclosure and the Anti-Fraud Provisions of the Federal Securities Laws

Abstract

This Article addresses a conflict between the fiduciary duty of disclosure under state law and the anti-fraud provisions of the federal securities laws. In the Securities Litigation Uniform Standards Act of 1998, Congress balanced the federal interest of discouraging frivolous securities litigation against the need of the states to regulate the conduct of corporate directors. In the Uniform Act, Congress preempted most state securities fraud class actions, but also specifically preserved state claims based on the fiduciary duty of disclosure as enunciated by the Delaware courts at the time of enactment. At that time, the Delaware courts had limited the fiduciary duty of disclosure to communications made when the corporation was seeking some sort of shareholder action, such as a shareholder's decision to vote or tender his securities. In other words, the fiduciary duty of disclosure would not attach if a misleading statement appeared in a corporate press release or public document made to the market generally. Congress drafted the so-called "Delaware carve-out" to reflect this distinction: under the Uniform Act, actions based on the fiduciary duty of disclosure are preserved only if shareholder action has been requested by the corporation. After the passage of the Uniform Act, however, the Delaware Supreme Court expanded the scope of the fiduciary duty of disclosure to reach all communications made by directors, whether shareholder action had been requested or not. Thus, following the Malone v. Brincat case, the Uniform Act preempts certain class actions based on a breach of fiduciary duty of disclosure, prohibiting the Delaware courts from holding directors of Delaware corporations liable for even flagrant breaches of their fiduciary duty of disclosure. This Article argues that Congress should amend the Delaware carve-out to preserve all actions based on a breach of fiduciary duty of disclosure, including actions based on misleading communications made to the market generally. It demonstrates that this approach will protect Delaware's strong interest in regulating the conduct of directors of corporations organized under its corporate statute without undercutting the important policies of the Uniform Act.