Should Corporate Law Preserve The Honor Of Salmon Or Fairness To Meinhard?

Should corporate law be concerned with the sinner or the sinned against?  In the venerable case of Meinhard v. Salmon, 249 N.Y. 458, 464 (1928), Benjamin Cardozo penned these now famous lines:

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. As to this there has developed a tradition that is unbending and inveterate.  Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions ( Wendt v. Fischer, 243 N. Y. 439, 444).  Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.  It will not consciously be lowered by any judgment of this court.

Chief Judge Cardozo's "rigid" approach to fiduciary duties is more concerned with preserving the honor, if not the soul, of the fiduciary.  Such a concern militates in favor of an outright ban on self-interested transactions, whether disclosed to, or ratified by, the persons to whom the fiduciary owes his or her duties.

Corporate law is not nearly so punctilious in regards to the fiduciary duty of directors (Salmon v. Meinhard involved co-venturers).  Thus, Section 310 of the California Corporations Code provides that no contract or other transaction between a corporation and one or more of its directors, or between a corporation and any corporation, firm or association in which one or more of its directors has a material financial interest, is either void or voidable because such director or directors or such other corporation, firm or association are parties or because such director or directors are present at the meeting of the board or a committee thereof which authorizes, approves or ratifies the contract or transaction, if specified disclosures and approvals are obtained.

All is not lost even if these disclosures and approvals are not obtained.  In such cases, a contract or other transaction will not be void or voidable if "the person asserting the validity of the contract or transaction sustains the burden of proving that the contract or transaction was just and reasonable as to the corporation at the time it was authorized, approved or ratified".  But even here there may be a tension between the honor of the fiduciary and interests of the corporation.  This tension is illustrated by two Nevada Supreme Court decisions applying Nevada law.  In Schoff v. Clough, 79 Nev. 193 (1963), the Court determined that the fact that a director might make a profit on a transaction with the corporation was wholly immaterial to the question of whether the transaction was fair.  Later in Pederson v. Owen, 92 Nev. 648 (1976), the Nevada Supreme Court held that a trial court's determination that a transaction was unfair to the corporation was unsupported because the corporation received exactly what it had ordered and there was no evidence of "substantial profiteering" by the other party.