• February 16, 2015
"A Tough Knot to Crack" (photo by Jay Fanelli)

“A Tough Knot to Crack” (photo by Jay Fanelli)

The most famous description of what a “fiduciary duty” is might come from the florid pen of New York Judge (and later U.S. Supreme Court Justice) Benjamin Cardozo who wrote about it in the case of Meinhard v. Salmon:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty…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… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd…the rule of undivided loyalty is relentless and supreme…

Got that? Of course you don’t. In these excerpts, at least, Cardozo does not really say what a fiduciary duty is at all. “Finest loyalty”? “The punctilio of an honor the most sensitive”? “Something stricter than the morals of the market place”?

Cardozo also says of the defendant in Meinhard v. Salmon, “Salmon had put himself in a position in which thought of self was to be renounced, however hard the abnegation.” Really? People who owe fiduciary duties must renounce self?

Suffice it to say that there are thousands of lawsuits where parties, their lawyers, and the courts try to apply this vague concept to particular facts. It is probably impossible to chart out with specificity just how much “self” one must “renounce” to meet one’s fiduciary duties owed to fellow partners, to fellow shareholders, to trust beneficiaries, etc.

Take, for example, the situation that brothers Anthony and Philip Conway found themselves in. They founded a successful company which “develop[ed] and manufactur[ed] catheters and other medical devices for sufferers of incontinence.” This got the attention of a larger company, C.R. Bard, Inc. that wished to gobble up the Conway’s company, offering $20-per-share for the company, which had been trading at $13-per-share.

As U.S. District Court Judge Patrick J. Schiltz (D. Minn.) wrote,

There was a hitch, though: Bard would go forward with the deal only if the Conways would sign five‐year non‐compete agreements. The Conways reluctantly agreed to sign the non‐compete agreements, Bard purchased [the Conway’s company] at the agreed‐upon price, and the Conways were paid tens of millions of dollars for their stock and other interests in RMC.

After, the Conways sought to get out of their non-compete agreements by arguing that they were compelled to enter into the deal with C.R. Bard because they owed fiduciary duties to their company shareholders. They were between a rock and a hard place — a kind of subtle “duress” or “coercion” kind of argument. They’d be liable to shareholders if they tanked the deal by rejecting the non-competes and they’d be liable to C.R. Bard if they entered into the deal but violated the non-competes. So they went to court to get permission, essentially, to toss out the non-competes.

It’s clever lawyering, no? I think so. But not clever enough to persuade the Court. The Court did not hold that the Conways did not owe fiduciary duties to fellow shareholders nor did the Court hold that the Conways would not have breached their fiduciary duties by tanking the deal by rejecting the non-compete. Rather, the Court (correctly, in my view) held that the Conways received adequate consideration to bind them to the deal that they knowingly entered into and from which they personally benefitted. There appears to have been no serious argument that they were literally forced or coerced to do the deal. They cashed in and, after the fact, sought more, essentially, by claiming “the fiduciary duty made me do it…”

We are left to wonder or speculate if, in an alternative universe, the Conways rejected the deal due to the buyer’s requirement of non-competes and had been sued by disappointed shareholders, would they have been liable for breaching the fiduciary duties owed to their fellow shareholders?

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