How, and when, did the law of American corporate fiduciary duties begin to develop differently? Kershaw shows that the Delaware variant of the business judgment rule emerged in the twentieth century. He traces the case law surrounding fiduciary duties back to the courts of England in the early 1700s. Rather than considering a successful legal transplant, a recent article follows a related English legal rule that failed to move across the Atlantic to the United States.
In English law, the internal management rule gives rise to the proposition that courts will not interfere in disputes between partners, shareholders, and managers. This rule now provides the strongest reasoning that prevents the courts from intervening in corporate governance disputes. Courts that follow the internal management rule will leave issues of internal management and policy to be debated, discussed, and decided by members. The shareholders, thus, play the role of regulator. They act as a check and balance on corporate management, regulate the corporation through voting at meetings, and those with the majority of votes hold control. Strong evidence of fraud or misconduct must be shown to rebut the notion that directors and managers acted appropriately.
These principles are now the central tenets of corporate regulation in both the United States and United Kingdom. The set of ideas described here should sound familiar to an American ear, but its name, the internal management rule, will not be well known. It resembles what is better known in the United States as the business judgment rule. These rules which restrict judicial intervention are thought to push corporate regulation in favor of the interests of directors and managers.
Just as the internal management rule does not exist in the United States, the business judgment rule is not a feature of English law. Why was the internal management rule not received into American corporate law? Law books, both English and American legal treatises, were the principal agents of legal change. They were engines for the development of new law. Academic writers dissected case law and in doing so, they theorized about law in an extensive and scholarly fashion. The internal management rule was established as a doctrinal formula in 1860 with Lord Nathaniel Lindley’s treatise. The rule gained judicial recognition in English corporate law with the decision of Burland v Earle (1902).
Lord Lindley was central to the development of corporate law in England and other common law jurisdictions within what was then the British Empire, but his jurisprudence was not influential in the United States. By this stage in the nineteenth century, the body of American scholarship was sufficiently well developed. Lindley’s text, despite its failure to stimulate American doctrinal development, was well read in the United States. Even so, judges and corporate lawyers in the United States took their inspiration from English law at the time of the founders. They continued receiving this knowledge long after English lawyers had disregarded it and moved on to new legal texts and legal ideas.
Victoria Barnes is a Senior Research Fellow at the Max Planck Institute for European Legal History.