Study On The Limitation Of Liability For Directors’ Breach Of Fiduciary Duty

From the perspective of the company’s development history,the company was built with shareholders as the center in the early stage;the articles of association were regarded as the internal charter of the company;the shareholders’ meeting was the highest authority reflecting the shareholders’ will,and the board of directors was the passive and mechanical executor of the resolution of the board of shareholders.With the development of social economy and company theory,the company gradually changed from shareholder centralism to director centralism.In the balance between the power of the shareholders’ meeting and the board of directors,the power of the board of directors expands constantly,and the accountability mechanism of the board of directors s increasingly strengthened.After fiduciary duty is invented,it becomes the best "rein" to restrain the director.Through the setting of fiduciary duty,the directors are able to accomplish their entrusted management affairs diligently and faithfully.Therefore,the fiduciary duty is generally considered as a mandatory norm and must not be excluded by the parties concerned.In the context of the increasingly prominent responsibility of directors,how to balance the rights and obligations of directors becomes increasingly important: that is,neither the directors’ powers are out of control,nor the director’s obligations are too heavy to constrain themselves which causes them to miss business opportunities in a rapidly changing market,or leads to the directors who receive limited remuneration improperly bear unlimitedcompensation risks,so the issue of exemption and restriction of directors’ fiduciary duty should be a new subject.The content of fiduciary duty of directors in foreign legislation and justice is also under constant adjustment,in order to make the rights and obligations of directors achieve a dynamic balance in a measured way.In view of the fiduciary duty system of directors in China,although the company law stipulates the duty of diligence and loyalty,the definition of the duty of diligence lacks operational standard,which is mostly at the discretion of the judge in judicial practice.Regulatory exemptions or restrictions on directors’ breach of fiduciary duty are rare.Therefore,it is necessary to re-examine whether our traditional concept of fiduciary duty is as solid as we believe,without any room for weakening it.Is it necessary for the director to assume all the responsibilities for breach of fiduciary duty,and there is no chance of restriction or exemption? If such liability can be limited or exempted,what is the due process? This paper is based on the logic of the above.The first chapter of this paper focuses on the basic theory of breach of fiduciary duty.To clarify whether or not the directors’ liability for breach of fiduciary duty should be exempted,it is necessary to first clarify what the fiduciary duty is,which should start from the nature of the company.Contracts may be expressed in written or verbal,dominant or recessive,explicit or implicit.The company,as a combination of contracts,does not have a manager-centered hierarchy in essence,and there is no so-called power or authority within the company.Companies are essentially free negotiation mechanisms between corporate participants,which can be confirmed by the organization and formation process of the company as well as the development history of the company.From the perspective of corporate contract theory,the value of company law is mainly reflected in: the role of providing standard forms of contract;Providing the function of supplementing loopholes in contracts between parties;Provide reasonable basis for the court’s judgment.Compared with general contracts,corporate contracts have long-term characteristics.In the long-term performance of a contract,subject to the variability ofexternal situation,limited rationality of the parties and transaction costs,and other factors,the parties often fail to fully grasp information to foresee all possible situations.Therefore,the contract reached by the parties will cause the phenomenon of "incomplete contract" for the problems to be standardized.The company law can play a role in supplementing contractual loopholes and effectively reduce transaction costs between parties.Due to information asymmetry,opportunism and other reasons,"contract invalidation" exists,which can explain why there are many mandatory norms of corporate law since it is a contract in essence.According to reliance theory,a fiduciary duty is that "the beneficiary imposes trust on the recipient,so that the latter has the attitude of the greatest sincerity,integrity,impartiality and loyalty,and acts in the best interests of the former.".Historically,fiduciary duty is developed from case law.Although the academic world has not yet settled,the two core contents of fiduciary duty are duty of care and duty of loyalty.The concept of fiduciary duty has always existed in Anglo-American legal system,but the specific identification needs to combine with the case situation.Although the civil law countries have no concept of fiduciary duty,the duty of care and duty of loyalty constructed with the relationship of agency or appointment as the basic legal principle are all stipulated in the substantive law.The second chapter analyzes whether the director’s liability for breach of fiduciary duty can be limited or exempted.In the actual transaction,the imperfection of the contract is an objective fact due to the limited rationality of the individual,the payment of transaction costs,the uncertainty of the objective environment and the opportunistic behavior of the parties.For some long-term contracts,the greater the possibility of various situations in the implementation process,the more difficult the prediction,and the incompleteness of the contract is more obvious.The incompleteness of the contract further determines the need to retain and give the parties sufficient autonomy to maintain the flexibility and tension of the contract in different situations.Freedom of contract and autonomy of will are the basic legal principles for the exemption or limitation of the director’s liability for breach of fiduciary duty.Fiduciary duty of directors is of great value to maintain the relationship between directors and the company,which is reflected in the fact that fiduciary duty has the function to supplement the series of contracts of the company;fiduciary duty can effectively reduce transaction cost;fiduciary duty is the embodiment of the principle of economic efficiency;fiduciary duty has the function of balancing the advantages and disadvantages under the transaction of control right.In essence,fiduciary duty is still derived from contracts.Judging from the emergence of the director’s fiduciary duty,it is still the result of free will decision of both parties.Out of respect for the reality of business uncertainty,shareholders shows a considerable degree of tolerance for the mistakes of directors(the principle of business judgment),which puts shareholders at risk of losing control of management and of unlimited erosion of interests.Although there are many methods to control agency cost: firstly,the existence of the manager market requires managers to face competition in the talent market;secondly,the existence of the market for corporate control makes companies with poor performance at risk of being squeezed out;Thirdly,the relentless rule of survival of the fittest in the product market places poses certain constraints on managers.However,these are not enough to address the root of the problem,since it is costly to assess and monitor management,and if the benefits far outweigh the costs,the manager will choose to breach the fiduciary duty.From the perspective of contract theory,although the exemption of duty of loyalty is a consistent expression of the subjective meaning of the parties,however,since the loyalty obligation is the fundamental basis for the trust of the parties,if the parties exempt the loyalty obligation beforehand,it will not conform to the basic purpose of the contract.Therefore,the prior complete waiver of the directors’ duty of loyalty to the company shall be prohibited,because it is similar to waive the parties’ obligation to engage in the commission under the entrustment contract.However,if a violation of the duty of loyalty occurs,the company’s right of exemption from liability should not be denied,because it is an inherent private right of the company and the law has no right to interfere.The third chapter makes a comparative study on the ways of limitation of liability for breach of fiduciary duty.In English law,the developmental responsibilities of directors’ duty of care are from broad to strict,from the earliest of pure subjectivist,which starts from completely judging whether the duty of care has been fulfilled from the actual situation of the individual director,later gradually developed to objective criteria on the basis of rational standard of the third person as the minimum standard,which finally confirmed by company law;while in American law,the development of directors’ duty of care is from strict to lenient.However,in both the United Kingdom and the United States,the standards for directors’ duty of care are constantly adjusted to meet the needs of commercial activities.Among the civil law countries,such as Germany and Japan,higher duty of care is proposed for directors,namely "expert criterion " and " kind hearted father criterion".Besides,the civil law system is subject to the statute law,and its judicial decisions are strictly subject to written law.Due to the strict standards,civil law countries are also trying other ways to find a breakthrough for the strict responsibility of directors.In terms of the limitation of directors’ liability for breach of fiduciary duty,the provisions of various countries mainly include: raising the standard of recognition of breach of fiduciary duty;exempting the illegality of director’s behavior through the principle of commercial judgment,etc.;exempting or restricting through the company’s articles of association(which is strictly controlled in practice,and even banned in most countries);exempting or restricting through by resolution of the board of directors or the board of directors;setting up the upper limit of the liability of directors(the Virginia State Company Law as a typical representative);compensation for the director’s expenses(the company to compensate the director for his loss when the director wins the case after being sued and held accountable by the company);transferring the director’s ultimate liability by insurance.Chapter four puts forward the construction scheme of director’s limitation of liability for breach of fiduciary duty in China.By sorting out the relevant laws and regulations about the fiduciary duty of directors in China,it can be seen that theregulations on the duty of loyalty of directors in China are relatively perfect,but the regulations on the duty of diligence of directors are quite general,and there are serious result-oriented responsibilities.The system of liability exemption or restriction of directors’ breach of fiduciary duty in China is currently unsound,which is limited to the dissent director immunity system and the director liability insurance system.As for the diligence obligation,since the legislation in our country is vague at present,it can explain the connotation of the diligence obligation,so that the director’s rights and obligations are matched.The ex ante exemption of the liability of the directors’ fiduciary duty should be strictly limited in China,whether it is exempted through the company’s articles of association or through other prior arrangement.On the one hand,if the act damages the interests of a third party other than the shareholder(such as the interests of the creditor),it is invalid to exempt the director from the liability through the articles of association or other provisions;On the other hand,based on the incomplete contract theory,the company and the director are unable to reasonably predict all the events and results that may occur in the future.Therefore,the scope of such exemption should not be the whole contents of the director’s fiduciary duty,but should be clearly limited.The duty of loyalty shall not be discharged in advance.Among them,the loyalty obligation must not be waived in advance;the duty of care only be absolved in advance of the liability for a minor breach of duty,and it should be banned if the director’s responsibility for a gross subjective fault of the director is waived in advance.In addition to restricting director’s liability for breach of fiduciary duty through the resolution of company’s shareholders’ meeting,it can also learn from the Japanese law that allows it to be conducted through the approval of the board of directors authorized by the shareholders.However,this method requires strict procedural requirements to prevent abuse of rights between directors and private acceptance.However,strict procedural requirements should be set in this way to prevent the abuse of rights and private deals between directors.It is necessary to further improve the disclaimer system for dissident directors,and stipulate the exemption of dissent directors’ duties in the general part of the company law,to govern and apply to joint stock limited companies and limited liability companies.Meanwhile,more detailed criteria should be set for the identification of "dissenting directors".Moreover,if the compensation system for directors’ expenses is established,the substantial victory of directors should be the precondition.Lastly,the director liability insurance system in China should be further improved.Its application will not necessarily lead to the reduction of directors’ attention degree and the consequences of damaging the interests of the company or shareholders.On the contrary,it will help to improve the company’s governance level and improve shareholders’ welfare.