Release Date: August 2, 2012
BUFFALO, N.Y. -- "Mitt Romney absolutely was legally responsible for the actions of Bain Capital after he 'retired' from the company in 1999 to run the Utah Olympics," says David Westbrook, JD, a legal scholar and recognized voice in corporate, contract and international law.
Westbrook, professor of law and Floyd H. & Hilda L. Hurst Faculty Scholar in the University at Buffalo Law School, points out that after his 'retirement,' Romney remained chairman of the board of directors, chief executive officer and sole shareholder of Bain Capital.
"As a matter of Delaware law," says Westbrook, "Romney was legally responsible for the management of Bain, which is a Delaware corporation, for so long as he was a director of the company and a member of top management, positions he continued to hold well beyond 1999."
Romney has not denied that he held corporate offices in Bain during the period in question. However, he says his offices were nominal, others were actually running the company and, therefore, he cannot be blamed for Bain's operations during the period in which the corporation was responsible for outsourcing jobs at companies it controlled.
"Understandably, many people find it hard to believe Romney's claims that he was not responsible for a company over which he had complete control and from which he profited mightily," says Westbrook.
"But he says that despite the confusion and obfuscation, "Delaware law is clear in this matter. Corporate directors and managers must fulfill their fiduciary duties of care and oversight; that is, those who hold those offices are responsible for the management of the company.
"One cannot evade such responsibility by simply saying, as Romney has, that other people were in fact running the company during the period," Westbrook says.
"By way of analogy, a captain of a ship cannot evade responsibility for a wreck by saying "I let somebody else steer." Somebody else may have been steering; the captain is still responsible.
From a legal perspective, he says The Washington Post's "Fact Checker" and others are wrong to focus on what Romney was "actually managing," and wrong to argue that "chief executive officer" is mere boilerplate because it is not a defined term at securities law.
"Federal securities law routinely imposes duties on directors and top management, whose roles are defined by state corporate law," Westbrook says.
"It is true that, in response to a case called Smith v. Van Gorkom, Delaware has allowed corporations to amend their charters to relieve directors from liability for failure to fulfill their 'duty of due care,' so long as they acted in 'good faith' and in accordance with the law and their 'duty of loyalty to the corporation, '" says Westbrook.
"However, subsequent cases, including Caremark and Stone v. Ritter, have made it clear that 'good faith' and the 'duty of loyalty' mean that directors cannot completely abdicate their responsibility as directors," he says.
Westbrook says, "One claim made in defense of Romney's position is that he was the sole shareholder of Bain Capital Inc., so as chairman and CEO, he essentially owed duties to himself, and that as shareholder/owner, i.e., the fiduciary duties normally imposed on directors and managers (in this case, Romney) could be waived by the beneficiary of those duties (also Romney).
"The problem with this argument," he says, 'is that Bain was incorporated, meaning that shareholders receive limited liability only insofar as the corporate form is observed. If the corporation is merely the alter ego of its owner, then the company is in effect a sole proprietorship, and the law 'pierces the corporate veil,' making the owner responsible for the activity of the business. "
Westbrook says that, to some, the fact that Bain was organized as a corporation may appear to be a mere legal technicality; that, as a matter of business reality, if not legal form, Bain was Romney's company, and if he wanted to pay attention to the Utah Olympics instead of running his business, that was his decision.
"In that case, however, the people who actually managed Bain were Romney's agents," says Westbrook, "and Romney is responsible for their actions as Bain's owner and principal -- just as employers are generally responsible for their employees.
"Perhaps Romney is telling the truth, even if it seems implausible, when he claims that while he was focused on the Utah Olympics, he did not participate in business decisions that his opponents now criticize. But even if that was the case," says Westbrook, "under Delaware law Romney remains responsible for Bain's management.
"For that reason, as Charles Blow at The New York Times says, Americans may not understand Romney's sophisticated dealings, and find him slippery -- a judgment the President's campaign is encouraging."