Research On Regulation Of Directors’ Self-dealing Under The State Of Delaware’s Corporate Law

Directors are regarded as the most possible group of people to conduct self-dealing fortheir control of corporation’s daily operation. The jeopardy for directors’ self-dealing isthat they may take advantage of their dominant position during the transaction withcorporation to seek their own benefit with breach of their duty of loyalty. The researchscope of this thesis focus on the legal regulation of directors’ self-dealing in the State ofDelaware for its highly developed and well regarded corporation law.The first chapter offers a general background induction of directors’ self-dealing. Theseparation of corporate ownership and control provides the possibility for the existence ofself-dealing, it also escalates the extent of distrust and intense relationship between thecompany’s owners and management. Directors’ self-dealing was treated negatively byAmerican common law courts in the early stage because of its internal conflict ofinterests. The development of self-dealing strongly impacted on the traditional theory ofdirectors’ duty of loyalty. The connection and difference between self-dealing andusurpation of corporate opportunity was also noted in the chapter.Chapter two presents the establishment of Safe Harbor Rule (“the Rule”). Since1930s,more and more U.S. State legislatures took progressive legislative actions to protect the effectiveness of self-dealing. The Rule weakened court’s judicial review on self-dealingcases. The interpretation and understanding of Safe Harbor Rule under the State ofDelaware’s common law mainly concentrated on whether the compliance of the Rule willmake the transaction effective; whether the Rule is the sole path to validate self-dealing;and whether court remains authority to investigate the fairness of transaction. Thischapter describes the content of the Rule, contains analysis of the Rule’s defects andlimited application, and explores the attitude of the court towards the Rule.Chapter three presents the judicial review standard of directors’ self-dealing byDelaware’s court. This chapter consists of five parts: information disclosure requirementsof self-dealing (as an in-advance mandatory warning mechanism); judicial reviewstandard on the validity of the approval by non-interested directors and shareholders;judicial review standard of management compensation; special regulation of directors’self-dealing in close-held companies; and introduction and application of the entirefairness standard.The last part of the thesis is the conclusion in which the summary of the whole thesis ismade. Research on directors’ self-dealing shall concentrate on the correct understandingof the characteristics of self-dealing, the influence of Safe Harbor Rule on directors’self-dealing and the judicial review practice. The conclusion part points out theimportance of non-mandatory regulation and the unique legal environment in the State ofDelaware.