The Efficient Norm for Corporate Law: A Neotraditional Interpretation of Fiduciary Duty

Abstract

This paper argues that a hypothetical contract analysis of fiduciary duty requires a corporate law norm that the total value of financial claims against the firm be maximized. This conclusion follows from using rational investors complying with the CAPM mandate as the parties making the hypothetical contract under which resources are committed to the firm. The analysis shows some inadequacies in the "shareholder value maximization" norm that is assumed in most corporate law literature. The norm of maximizing firm value fits best with an abstract conception of fiduciary duty in which the duty is owed to the corporation, rather than to shareholders or any other particular class of security holders. Adopting this conception dissolves many of the fiduciary duty puzzles posed by derivative securities, such as those stressed by Hu.