"Good Faith," State of Mind, and the Outer Boundaries of Director Liability in Corporate Law
The Delaware General Corporation Law was amended in 1986 to permit shareholder-approved exculpatory charter provisions shielding corporate directors from monetary liability for certain fiduciary duty breaches not including (among other things) breaches of the duty of loyalty and acts not in “good faith.” This paper examines the development of corporate fiduciary duty doctrine in Delaware leading up to and following this statutory amendment, focusing particularly on the Delaware courts’ evolving conception of the meaning and doctrinal status of the “good faith” concept employed in recent cases to permit a non-exculpable cause of action for conscious nonfeasance.
The paper argues that Delaware’s “good faith” case law and statutory exculpation regime have contributed to a fiduciary duty framework that is internally contradictory and practically unworkable. It proposes a remedy in the form of a statutory amendment replacing the exculpation regime with a provision permitting the imposition of monetary liability only for “loyalty” breaches, defined to include cases of conscious nonfeasance recently styled by the courts as acts not in “good faith.”
The proposed regime, it is argued, would generally track what Delaware
case law, fairly read, already permits with regard to monetary liability
for breaches of fiduciary duty, while offering substantial benefits associated
with a logically coherent system both workable for courts and comprehensible
by the market. It would also remain consistent with what the paper argues
is, and has been, the functional distinction between duty of care analysis
and duty of loyalty analysis: the minimization of agency costs through
assessment of the quality of decisions, on the one hand, and the quality
of intentions, on the other.
Keywords: corporate law, corporate governance, fiduciary duties, good faith, business judgment rule, exculpation
JEL Classifications: K22 - Corporation and Securities Law
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