The Nature of Fiduciary Duties Owed to Limited-Life Corporations

December 13, 2023

Publication| Corporate Transactions| Corporate Governance| Mergers & Acquisitions| Special Committees & Investigations

The fiduciary duties of directors of a Delaware corporation are frequently summarized as follows: “[T]he fiduciary relationship requires that the directors act prudently, loyally, and in good faith to maximize the value of the corporation over the long-term.” Embedded within that formulation is a temporal element: the duty is tied to the deliberately amorphous “long term” rather than any target sooner in time.

This core tenet of Delaware corporate law—often called the “standard of conduct” because it conveys what is expected of directors—is often invoked glancingly without further explanation. But in 2013, in In re Trados Inc. Shareholder Litigation, the Delaware Court of Chancery explained in detail the underpinnings of the temporal element—namely, that both the corporation and its equity capital are presumptively perpetual pursuant to the structure of the Delaware General Corporation Law (“DGCL”), which provides by default that corporations have unlimited life and that equity investments (which, unlike debt, do not have a fixed maturity) in the corporation constitute permanent capital. Due to this structure, the court reasoned, fiduciary duties oblige directors to act to maximize long-term value so that the corporation’s common stockholders (or “residual claimants”) will benefit from profits and earnings, in the form of dividends, if declared, during the life of the corporation and will be paid a theoretical maximum value upon an end-of-life scenario, such as a cash-out merger or dissolution (which involves winding up the business, liquidating, and distributing assets).

This article explores whether there is, or should be, a shift in the directors’ standard of conduct when a critical premise of Trados—presumptive perpetual existence—is missing by virtue of a provision of the corporation’s certificate of incorporation (or “charter”) that effectively imposes a deadline on the corporation’s existence, thereby creating what we refer to as a “limited-life” corporation. We first explain the logic of Trados and then apply that logic to limited-life corporations—including, for example, special purpose acquisition companies, or “SPACs,” whose directors have become frequent targets of fiduciary litigation. We conclude that directors of limited-life corporations, like SPACs, owe the same fiduciary duties of care and loyalty as directors of traditional corporations. But, as the Delaware courts have noted, the proper discharge of fiduciary duties is context-specific. In the context of a limited-life corporation, the directors’ context-specific duties require them to maximize value not over the long term but instead within the corporation’s known life span. For that reason, if Trados is to be followed, directors of a limited-life corporation should bear in mind the shorter horizon for value maximization when determining the best interests of the corporation and its stockholders generally.

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