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The Duality of Loyalty: Identifying the Minimum and Maximum Conditions of The Duty of Loyalty

Professor George P. Fletcher touched upon this concept in his insightful essay on loyalty and the morality of relationships.  Fletcher perceptively posits that loyalty has both “minimum” and “maximum” conditions; each of which require their own behavioral rules and obligations.   The minimum condition of loyalty is similar to the current public conception of the corporate fiduciary duty of loyalty in that it requires the actor to “reject temptation” and do so with only a “minimum commitment of non-betrayal”.  This is akin to the prohibitions on self-dealing that have been so frequently illustrated in Delaware case law: “The essence of a duty of loyalty claim is the assertion that a corporate officer or director has misused power over corporate property or processes in order to benefit himself rather than advance corporate purposes.”

Conversely, the maximum condition of loyalty more robustly involves “affirmative duties of devotion” that run in favor of another “such as a nation” not just a restraint or inhibition on self-interest.  Careful research indicates that the Delaware courts have, in fact, ruled in support of this expanded “maximum” thrust of the duty of loyalty.  In Mills Acquisition Co. v. MacMillian Inc., the Delaware Supreme Court proclaimed that “[n]ot only do these principles demand that corporate fiduciaries absolutely refrain from any act which breaches the trust reposed in them, but also to affirmatively protect and defend those interests entrusted to them.”  That court stressed that subduing self-serving impulses is not, by itself, the same as acting loyally.  

The recognition of a “maximum” thrust of the duty of loyalty by the Delaware Courts is not a new phenomenon, either.  A close analysis of the Delaware Supreme Court’s ruling in the seminal 1939 case, Guth v. Loft Inc. shows how the Court accepts this maximum thrust as a postulate when emphasizing the other, minimum thrust of the duty of loyalty.  The Court described this dual thrust of director loyalty in the context of usurping corporate opportunities as “not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it.”  

Furthermore, the fact that this double-edged duty of loyalty has been recognized by the Delaware Supreme Court as far back as 1875 lends credence to its importance and propriety in not only this analysis, but (what should be) our collective conception of corporate fiduciary duties as a whole.  The fact that this (apparently) original understanding of the duty of loyalty has been diluted over time reinforces the potentially problematic lineage of rulings that “generaliz[e] from the particular”.  As previously discussed, because the majority of instances involving a breach of the duty of loyalty (and therefore the majority of cases/rulings) pertain to a breach of the “minimum” condition of this duty, rulings on this duty (and thereby descriptions of its scope and obligations) focus tightly on the single, minimum thrust of loyalty at issue.  Accordingly, the common conception of the duty of loyalty diminishes over time by failing to acknowledge the duty’s affirmative “maximum” thrust because the majority of judicial discussion necessarily omits it.      

In accordance with the rare(r) cases where a director or officer is held to have violated the duty of loyalty despite having been deemed to be acting in good faith and in accordance with the best interests of the company, the duty of loyalty most certainly includes more than either self-dealing or usurping corporate opportunities by way of the affirmative thrust of its “maximum” condition.  That said, we must consider the ways in which this affirmative thrust of the duty of loyalty might apply to the proposed actions of Apple, Inc. CEO Tim Cook in our foregoing hypothetical.  Conceptually, there are multiple ways in which the duty of loyalty’s maximum condition could attach to this scenario; all of which must pass through the courts’ use of the business judgment rule and its checks against to the duty of loyalty in evaluating a proper “business decision”.