The convergence of good faith and oversight

UCLA Law Review

Volumn 55, Issue 3, 2008, Pages 559-605

  Bainbridge, Stephen M ^a   Lopez, Star ^b   Oklan, Benjamin ^b  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b NONE

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EID: 41849098552     PISSN: 00415650     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (372)

1. 911 A.2d362 (Del. 2006) (en banc).
2. Arthur Fleischer, Jr. & Alexander R. Sussman, Directors' Fiduciary Duties in Takeovers and Mergers, in FIRST ANNUAL DIRECTORS' INSTITUTE ON CORPORATE GOVERNANCE 911, 918 (PLI Corporate Law and Practice, Course Handbook Series 2003).
3. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (stating that a shareholder-plaintiff rebuts the business judgment rule by "providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty-good faith, loyalty or due care").
4. Stone, 911 A.2d at 70.
5. Bayless Manning, The Business Judgment Rule and the Director's Duty of Attention: Time for Reality, 39 BUS. LAW. 1477, 1494 (1984).
6. See, e.g., Jonathan L. Johnson et al., Boards of Directors: A Review and Research Agenda, 22 J. MGMT. 409, 411 (1996) (mapping "directors responsibilities into three broadly defined roles . . . labeled control, service, and resource dependence").
7. See, e.g., Am. Bar Ass'n, Corporate Director's Guidebook: Third Edition, 56 BUS. LAW. 1571, 1582 (2001) (stating that the duty of care expresses "the need to pay attention, to ask questions and to act diligently and reasonably to become and remain generally informed").
8. Rabkin v. Philip A. Hunt Chem. Corp., 1987 WL 28436, at *3 (Del. Ch. Dec. 17, 1987).
9. See Grimes v. Donald, No. CIV.A. 133578, 1995 WL 54441, at *8 n.6 (Del. Ch. Jan. 11, 1995) (stating that a board meets "its management responsibilities by appropriately appointing and monitoring[] corporate officers and exercising informed business judgment with respect to corporate goals and performance"),
10. aff' d en banc on other grounds, 673 A.2d 1207 (Del. 1996);
11. see also Am. Bar Ass'n, supra note 7, at 1582 (stating that the duty of care requires directors "to become and remain generally informed, including doing the 'homework' of reading materials and other preparation in advance of meetings in order to participate effectively in board deliberations").
12. 698 A.2d 959 (Del. Ch. 1996).
13. Id. at 970.
14. See Jayne W. Barnard, Reintegrative Shaming in Corporate Sentencing, 72 S. CAL. L. REV. 959, 988 (1999) (noting that Caremark's "dictum on the role of the board in creating information and reporting programs has not been endorsed by the Delaware Supreme Court");
15. J. Robert Brown, Jr., The Irrelevance of State Corporate Law in the Governance of Public Companies, 38 U. RICH. L. REV. 317, 345 (2004) ("Neither the Caremark decision nor its rationale ever received approval by the Supreme Court of Delaware.").
16. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 365 (Del. 2006) (en banc).
17. Compare Tafeen v. Homestore, Inc., No. CIV.A. 023-N, 2004 WL 556733, at *10 (Del. Ch. Mar. 22, 2004) ("This Court has historically given great deference to informed decisions of a board of directors."),
18. with In re General Motors (Hughes) S'holder Litig., No. CIV.A. 20269, 2005 WL 1089021, at *23 (Del. Ch. Mar. 4, 2005) ("Delaware has an interest in ensuring that boards of directors of Delaware corporations fulfill their fiduciary duties . . . .").
19. As Melvin Eisenberg has observed: The duty of good faith is well established in corporate law. To begin with, the duty has long been established in statutes. Many or most corporate statutes explicitly impose the duty of good faith on directors, officers, or both, and all or virtually all statutes implicitly impose the duty of good faith under a variety of provisions, such as those concerning indemnification. The duty of good faith also has long been implicitly recognized in case law-for example, in the formulation of the business judgment rule, and in fiduciary obligations that can only be explained by that duty, such as the duty not to knowingly cause the corporation to violate the law - and within the last fifteen years, the duty has been explicitly recognized in a number of Delaware cases. Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1, 4 (2006).
20. Delaware General Corporation Law (DGCL) section 145 permits indemnification in suits brought against individual directors or officers. DEL. CODE ANN. tit. 8, §145 (2001). Specifically, in suits brought by third parties or directly by shareholders, section 145(a) allows indemnification for expenses, "judgments, fines, and amounts paid in settlement," in connection with, brought by, or on behalf of the corporation.
21. Id. § 145(a). Section 145(b) authorizes indemnity only with respect to expenses.
22. Id. § 145(b). Both subsections require, among other things, that the director have acted in good faith.
23. Id. § 145(a)-(b). Only under section 145(c) must the corporation indemnify a director or officer who "has been successful on the merits or otherwise," without regard to whether the director acted in good faith or not.
24. Id. § 145(c);
25. see also Waltuch v. Conticommodity Servs., 88 F.3d 87, 96 (2d Cir. 1996) (interpreting Delaware law).
26. DEL. CODE ANN. tit. 8, § 141(e).
27. Id. §144(a)(1)-(2).
28. See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (defining the business judgment rule as "a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company"). For a court to apply the business judgment rule, no fraud, illegality, or conflict of interest may exist.
29. See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 872-73 (Del. 1985) (en banc). The board also must have acted in good faith as disinterested directors.
30. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006) (en banc). Furthermore, the business judgment rule will not apply in cases in which the board acted irrationally by way of an uninformed or wasteful decision.
31. See, e.g., Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000).
32. See Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 DUKE L.J. 1, 15-16 (2005) ("The mystery of good faith... was unexplored for almost two decades, until the chancery court's development of good faith jurisprudence in 2003.");
33. see also id. at 13 ("[N]either the functional meaning of good faith nor its potential relationship to other corporate law doctrines has ever been specified.").
34. But cf. Myron T. Steele, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 DEL. J. CORP. L. 1, 29 (2007) (suggesting that earlier cases had treated "bad faith as tantamount to fraud or an absence of rationality or a decision so far beyond the bounds of reasonable judgment that it established a bad faith act or omission" (internal quotation marks omitted) (footnote omitted)).
35. E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Governance From 1992-2004? A Retrospective on Some Key Developments, 153 U. PA. L. REV. 1399, 1442 (2005).
36. Fleischer & Sussman, supra note 2, at 918.
37. Id. at 985 app. 3.
38. 634 A.2d 345 (Del. 1993).
39. Id. at 361 (emphasis added) (citations omitted) (internal quotation marks omitted).
40. Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. REV. 83, 94-95 (2004) ("Notice how the court puts the cart before the horse. Directors who violate their duty of care do not get the protections of the business judgment rule; indeed, the rule is rebutted by a showing that the directors violated their fiduciary duty of 'due care.' This is exactly backwards. . . . [T]he whole point of the business judgment rule is to prevent courts from even asking the question: did the board breach its duty of care?" (footnotes omitted)).
41. See Steele, supra note 20, at 29 ("Delaware courts first recognized the duty of good faith as a freestanding fiduciary duty, with no discussion about why, in the Delaware Supreme Court's opinion in Cede & Co. v. Technicolor Inc.").
42. Id.
43. In addition to the sources cited elsewhere in this Article, see Robert Baker, in re Walt Disney: What It Means to the Definition of Good Faith, Exculpatory Clauses, and the Nature of Executive Compensation, 4 FLA. ST. U. BUS. REV. 261 (2005);
44. Matthew R. Berry, Does Delaware's Section 102(b)(7) Protect Reckless Directors From Personal Liability? Only if Delaware Courts Act in Good Faith, 79 WASH. L. REV. 1125 (2004);
45. Carter G. Bishop, A Good Faith Revival of Duty of Care Liability in Business Organization Law, 41 TULSA L. REV. 477 (2006);
46. Tara L. Dunn, The Developing Theory of Good Faith in Director Conduct: Are Delaware Courts Ready to Force Corporate Directors to Go Out-of-Pocket After Disney IV?, 83 DENV. U. L. REV. 531 (2005);
47. Andrew S. Gold, A Decision Theory Approach to the Business Judgment Rule: Reflections on Disney, Good Faith, and Judicial Uncertainty, 66 MD. L. REV. 398 (2007);
48. Sean J. Griffith & Myron T. Steele, On Corporate Law Federalism Threatening the Thaumatrope, 61 BUS. LAW. 1 (2005);
49. John L. Reed & Matt Neiderman, "Good Faith" and the Ability of Directors to Assert § 102(b)(7) of the Delaware General Corporation Law as a Defense to Claims Alleging Abdication, Lack of Oversight, and Similar Breaches of Fiduciary Duty, 29 DEL. J. CORP. L. 111 (2004);
50. David Rosenberg, Making Sense of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, 29 DEL. J. CORP. L. 491 (2004);
51. C.G. Hintmann, Comment, You Gotta Have Faith: Good Faith in the Context of Directorial Fiduciary Duties and the Future Impact on Corporate Culture, 49 ST. LOUIS U. L.J. 571 (2005).
52. For an able analysis of Technicolor and its progeny, see Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law, 41 WAKE FOREST L. REV. 1131, 1151-57 (2006).
53. Id. at 1152.
54. Id. at 1155.
55. See, e.g., Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001);
56. McMullin v. Beran, 765 A.2d 910 (Del. 2000);
57. Malone v. Brincat, 722 A.2d 5 (Del. 1998) (en banc).
58. Of the pre-2006 Delaware Supreme Court cases found using the Westlaw search terms "triad! /s fiduciary!," only Emerald Partners v. Berlin, 726 A.2d 1215 (Del. 1999) (Walsh, J.), was not written by Justice Holland.
59. 746 A.2d 244 (Del. 2000) (en banc).
60. Veasey & Di Guglielmo, supra note 21, at 1449-50. E. Norman Veasey and Christine Di Guglielmo include Jack Jacobs and Leo Strine among the triad's judicial skeptics.
61. See id. at 1450 n.191 (analyzing cases).
62. Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003). Up until 2006, the triad formulation and the corollary proposition that good faith is a freestanding duty thus appeared to be an example of the cycling phenomenon identified by David Skeel.
63. See generally David A. Skeel, Jr., The Unanimity Norm in Delaware Corporate Law, 83 VA. L. REV. 127 (1997). Until quite recently, the Delaware Supreme Court heard most corporate governance cases not en banc but rather using three-judge panels.
64. Cf. Randy J. Holland & David A. Skeel, Jr., Deciding Cases Without Controversy, 5 DEL. L. REV. 115, 121 (2002) ("[T]he Delaware Supreme Court continues to generally hear all but capital cases initially in three-justice panels . . . ."). In addition, the court has a longstanding unanimity norm making split decisions very rare.
65. See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 939 n.90 (Del. 2003) (en banc) (Veasey, C.J., dissenting) ("Split decisions by this Court, especially in the field of corporation law, are few and far between."). The formulations adopted in any given opinion thus depend on the composition of the panel and the identity of the jurist assigned to write the opinion. As a result, even sharp differences among the members of the court can be masked, while Delaware law cycles between competing doctrinal approaches to the same problem depending on which jurist wrote the most recent opinion.
66. See, e.g., Skeel, supra, at 147-48. As one of us has demonstrated elsewhere, Delaware's business judgment rule jurisprudence demonstrates just such a pattern of cycling.
67. See STEPHEN M. BAINBRIDGE, CORPORATION LAW AND ECONOMICS 249-51 (2002) (discussing relevant precedents).
68. Bainbridge, supra note 26, at 84.
69. For a much more detailed first principles-based argument for a presumption of judicial deference to board of director decisions absent self-dealing, see id. at 102-29.
70. See id. at 102-09.
71. 1 AM. LAW INST., PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND RECOMMENDATIONS § 4.01 cmt. d (1994).
72. See Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 STAN. L. REV. 819, 839 (1981) (noting that the business judgment rule "bar[s] courts from providing additional, and unnecessary, constraints on management discretion through judicial review of operating decisions" (alteration in original));
73. Jonathan R. Macey, Private Trusts for the Provision of Private Goods, 37 EMORY L.J. 295, 315 (1988) (explaining that market constraints such as "[c]ompetition in capital markets, product markets, and the market for corporate control" protect shareholder interests in a public corporation).
74. See generally Bainbridge, supra note 26, at 109-29 (explaining costs that would be imposed by active judicial oversight of board decisions).
75. See, e.g., Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 374 (Del. Ch. 2004) ("[T]he director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes."). As a general matter, the board of directors acts on behalf of the corporation by collective decisionmaking. Delaware defines an act of the board of directors as "[t]he vote of the majority of the directors present at a meeting at which a quorum is present."
76. DEL. CODE ANN. tit. 8, § 141(b) (Supp. 2006). In contrast, an individual director cannot unilaterally bind the corporation.
77. RESTATEMENT (SECOND) OF AGENCY § 14C cmt. b (1958).
78. See, e.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del. 1988) ("We have held that when a court reviews a board action, challenged as a breach of duty, it should decline to evaluate the wisdom and merits of a business decision unless sufficient facts are alleged with particularity, or the record otherwise demonstrates, that the decision was not the product of an informed, disinterested, and independent board.");
79. AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986) ("Ordinarily when a court is required to review the propriety of a corporate transaction challenged as constituting a breach of duty or is asked to enjoin a proposed transaction on that ground, it will, in effect, decline to evaluate the merits of wisdom of the transaction once it is shown that the decision to accomplish the transaction was made by directors with no financial interest in the transaction adverse to the corporation and that in reaching the decision the directors followed an appropriately deliberative process.").
80. See Gilson, supra note 40, at 840.
81. Robert J. Haft, The Effect of Insider Trading Rules on the internal Efficiency of the Large Corporation, 80 MICH. L. REV. 1051, 1062-63 (1982).
82. See, e.g., Mills, 559 A.2d at 1279 (holding that "judicial reluctance to assess the merits of a business decision ends in the face of illicit manipulation of a board's deliberative processes by self-interested corporate fiduciaries"). Because "[a] business corporation is organized and carried on primarily for the profit of the stockholders,"
83. Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919), directors of the board have a fiduciary duty to take action that first and foremost serves the interest of the corporation and its shareholders,
84. see, e.g., Broz v. Cellular Info. Sys., 673 A.2d 148, 154 (Del. 1996) ("A corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances."). When boards of directors take self-interested action to the disadvantage of the corporation, they will be found to have breached their fiduciary duty of loyalty, unless they are able to bear the burden of proof in establishing the transaction's fairness to the corporation.
85. Marciano v. Nakash, 535 A.2d 400, 403 (Del. 1987).
86. Bayer v. Beran, 49 N.Y.S.2d 2, 6 (N.Y. Special Term 1944)
87. (quoting In re Ryan's Will, 52 N.E.2d 909, 923 (N.Y. 1943) (Conway, J.)).
88. Even when a director's decision may be tainted by self-interest, title 8, section 144(a)(1) of the DGCL, effectively shields such self-interested transactions from judicial review if a majority of the disinterested directors approved the transaction. See Marciano, 535 A.2d at 405 n.3 (explaining that "approval by fully-informed disinterested directors under section 144(a)(1) . . . permits invocation of the business judgment rule and limits judicial review to issues of gift or waste with the burden of proof upon the party attacking the transaction").
89. Stephen M. Bainbridge, independent Directors and the ALI Corporate Governance Project, 61 GEO. WASH. L. REV. 1034, 1075-78 (1993).
90. See generally Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 DEL. J. CORP. L. 769 (2006).
91. See LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION 46-47 (2004) (criticizing the rules governing derivative litigation as preventing shareholders from holding directors accountable). When the cause of action belongs to individual shareholders, shareholders may individually file suit in their own names. In contrast, if the board's conduct harms the corporation, shareholders may merely bring a derivative suit on the corporation's behalf.
92. See e.g., Grimes v. Donald, 673 A.2d 1207, 1213 (Del. 1996) (en banc) (finding that shareholders may bring a direct suit if the directors relinquish their authority to the corporation's officers).
93. Marx v. Akers, 666 N.E. 2d 1034, 1037 (N.Y. 1996). The court further noted the need to strike "a balance between preserving the discretion of directors to manage a corporation without undue interference, through the demand requirement, and permitting shareholders to bring claims on behalf of the corporation when it is evident that directors will wrongfully refuse to bring such claims,"
94. id., which is precisely the balance between authority and accountability our analysis predicts.
95. See also Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (noting that "the derivative action impinges on the managerial freedom of directors").
96. One of us elsewhere advanced this point in the context of analyzing the business judgment rule. See Bainbridge, supra note 26, at 107-09. Former Delaware Supreme Court Chief Justice Veasey subsequently cited that article's analysis, deeming it to be "consistent with the Delaware doctrine that the rule is a presumption that courts will not interfere with, or second-guess, decision making by directors."
97. Veasey & Di Guglielmo, supra note 21, at 1422.
98. See KENNETH J. ARROW, THE LIMITS OF ORGANIZATION 78 (1974) ("If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B and hence no solution to the original problem.").
99. Bainbridge, supra note 26, at 121;
100. cf. Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J., concurring) ("We are not final because we are infallible, but we are infallible only because we are final.").
101. Joy v. North, 692 F.2d 880, 886 (2d Cir. 1982).
102. See Jeffrey J. Rachlinski, A Positive Psychological Theory of Judging in Hindsight, 65 U. CHI. L. REV. 571, 574 (1998) (arguing that "in corporate law, the business judgment rule protects corporate officers and directors from liability for negligent business decisions because, in part, of the tendency for adverse outcomes to seem inevitable").
103. See FRANK H. EASTERBROOK & DANIEL R. FLSCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 100 (1991).
104. Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000) (en banc).
105. David L. Cotton, Fixing CPA Ethics Can Be an Inside Job, WASH. POST, Oct. 20, 2002, at B2.
106. See, e.g., Larry E. Ribstein, Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002, 28 J. CORP. L. 1, 4-7 (2002).
107. E. Norman Veasey, Policy and Legal Overview of Best Corporate Governance Principles, 56 SMU L. REV. 2135, 2136 (2003) (alteration in original).
108. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15, 18, and 28 U.S.C.).
109. For an overview, see STEPHEN M. BAINBRIDGE, THE COMPLETE GUIDE TO SARBANES-O XLEY: UNDERSTANDING HOW SARBANES-OXLEY AFFECTS YOUR BUSINESS (2007).
110. See id. at 176-78.
111. Ribstein, supra note 61, at 14.
112. See Deborah Solomon, SEC to Approve Governance Rules by NYSE, Nasdaq, WALL ST. J., Oct. 13, 2003, at C5.
113. NYSE Euronext, Listed Company Manual § 303A.01, available at http://www.nyse.com/lcm/lcm_section.html (follow "Section 3 Corporate Responsibility" hyperlink; then follow "303A.00 Corporate Governance Standards" hyperlink; then follow "303A.01 Independent Directors" hyperlink) (last visited Dec. 6, 2007).
114. See NYSE Euronext, Listed Company Manual § 303A.06, available at http://www.nyse.com/lcm/lcm_section.html (follow "Section 3 Corporate Responsibility" hyperlink; then follow "303A.00 Corporate Governance Standards" hyperlink; then follow "303A.06 Audit Committee" hyperlink) (last visited Dec. 6, 2007).
115. NYSE Euronext, Listed Company Manual § 303A.08, available at http://www.nyse.com/lcm/lcm_section.html (follow "Section 3 Corporate Responsibility" hyperlink; then follow "303A.00 Corporate Governance Standards" hyperlink; then follow "303A.08 Shareholder Approval of Equity Compensation Plans" hyperlink) (last visited Dec. 6, 2007).
116. See BAINBRIDGE, supra note 64, at 27-28 (discussing the origins and goals of the new stock exchange listing standards).
117. Eisenberg, supra note 15, at 6.
118. Hillary A. Sale, Delaware's Good Faith, 89 CORNELL L. REV. 456, 464 (2004).
119. Id. at 469.
120. Id. at 462.
121. Eisenberg, supra note 15, at 5.
122. Griffith, supra note 20, at 34.
123. Id. at 47.
124. Sean Griffith has suggested that even a prominent Delaware jurist was considering such a shift: Good faith, Veasey then suggested, might be usefully employed as a doctrinal hook to incorporate the emerging consensus on best corporate governance practices. Stating first that "the utter failure to follow the minimum expectations of the evolving standards of director conduct, the minimum expectations of Sarbanes-Oxley, or the NYSE or NASDAQ Rules . . . might . . . raise a good faith issue," Veasey later repeated that "it is arguable - but not settled - that the issue of good faith may be measured . . . against the backdrop of Sarbanes-Oxley and the SRO requirements." Id. at 48 (footnotes omitted) (quoting E. Norman Veasey).
125. Bainbridge, supra note 26, at 109.
126. Rabkin v. Philip A. Hunt Chem. Corp., 1987 WL 28436, at *2 (Del. Ch. Dec. 17, 1987).
127. Delaware tort law defines negligence as "the want of due care or want of such care as a reasonably prudent and careful person would exercise under similar circumstances." Orsini v. K-Mart Corp., No. 95C-07-146-WTQ, 1997 WL 528034, at *3 (Del. Super. Ct. Feb. 25, 1997)
128. (citing Kane v. Reed, 101 A.2d 800, 801 (Del. Super. Ct. 1954)).
129. Joseph W. Bishop, Jr., Sitting Ducks and Decoy Ducks: New Trends in the Indemnification of Corporate Directors and Officers, 77 YALE L.J. 1078, 1099 (1968).
130. 1 DENNIS J. BLOCK ET AL., THE BUSINESS JUDGMENT RULE: FIDUCIARY DUTIES OF CORPORATE DIRECTORS 167-72 (5th ed. 1998).
131. In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 748 (Del. Ch. 2005) (stating that "in instances where directors have not exercised business judgment, that is, in the event of director inaction, the protections of the business judgment rule do not apply"), aff'd, 906 A.2d 27(Del. 2006) (en banc).
132. See Kenneth B. Davis, Jr., Once More, the Business Judgment Rule, 2000 WIS. L. REV. 573, 576 ("[C]ases in which the directors are charged with negligence in failing to detect or respond to a problem [are] often referred to as the directors' 'oversight function.'" (second alteration in original)).
133. See supra note 7 and accompanying text.
134. 188 A.2d 125 (Del. 1963).
135. See id. at 129.
136. See id. at 128.
137. See id. at 127.
138. See Marc I. Steinberg, The Role of Inside Counsel in the 1990s: A View From Outside, 49 SMU L. REV. 483, 487 n.21 (1996) ("[B]ecause the board of directors never focused on the issue [in Graham], the business judgment analysis was not applied." (second alteration in original)).
139. Graham, 188 A.2d at 127.
140. Id. at 129-30.
141. Id. at 129.
142. See id. ("Plaintiffs have wholly failed to establish either actual notice or imputed notice to the Board of Directors of facts which should have put them on guard, and have caused them to take steps to prevent the future possibility of illegal price fixing and bid rigging.").
143. Id.
144. See id.
145. Id.
146. Id.
147. See id. at 130 ("The precise charge made against these director defendants is that, even though they had no knowledge of any suspicion of wrongdoing on the part of the company's employees, they still should have put into effect a system of watchfulness which would have brought such misconduct to their attention in ample time to have brought it to an end.").
148. Id.
149. Delaware law generally invokes gross negligence as the standard of review in duty of care cases. See, e.g., McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000) ("Director liability for breaching the duty of care 'is predicated upon concepts of gross negligence.'");
150. Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985) (en banc) ("[G]ross negligence is . . . the proper standard for determining whether a business judgment . . . was an informed one.");
151. see also Rabkin v. Philip A. Hunt Chem. Corp., 547 A.2d 963, 970 (Del. Ch. 1986) (defining gross negligence for this purpose as "reckless indifference to or a deliberate disregard of the stockholders" or conduct outside the "bounds of reason," and suggesting that that standard created a higher threshold for liability than the usual tort concept of gross negligence (citations omitted)).
152. Oddly, however, it is not entirely clear whether the Graham court reviewed the plaintiffs' claims under an ordinary or gross negligence standard. On the one hand, the court suggested the directors could make "themselves liable for failure to exercise proper control" over the company's employees "by neglect." Graham, 188 A.2d at 130. On the other hand, the court also used such terms as "recklessly" and "neglected cavalierly,"
153. id., both of which suggest a standard higher than ordinary negligence.
154. Some subsequent chancery court opinions expressly adopted the gross negligence standard in oversight cases. See, e.g., Seminaris v. Landa, 662 A.2d 1350, 1355 (Del. Ch. 1995) ("In order to hold the directors liable, plaintiff will have to demonstrate that they were grossly negligent in failing to supervise these subordinates."). In the Rabkin decision, however, the chancery court split the baby, holding that the gross negligence standard is limited to situations in which the board has rendered a decision, but that ordinary negligence is the appropriate standard when directors fail to act.
155. Rabkin v. Philip A. Hunt Chemical Corp., 1987 WL 28436, at *3 (Del. Ch. Dec. 17, 1987).
156. See Graham, 188 A.2d at 130 (holding that "absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists").
157. 634 A.2d 345 (Del. 1993).
158. Id. at 364 n.31.
159. See 1 AM. LAW INST., supra note 39, § 4.01(a) cmt. d.
160. See BAINBRIDGE, supra note 36, at 293-94, on which the following paragraphs draw.
161. See, e.g., Hyun Na Seo v. Yozgadlian, 726 A.2d 972, 973-74 (N.J. Super. Ct. App. Div. 1999).
162. See Collier v. Zambito, 807 N.E.2d 254, 256 (N.Y. 2004) (noting that even in the absence of a prior bite, a triable issue of fact regarding knowledge of vicious propensities may be raised by other evidence of the dog's aggressive behaviors).
163. See H.J. Aibel, Corporate Counsel and Business Ethics: A Personal Review, 59 MO. L. REV. 427, 437-38 (1994) (listing the elements of an effective program).
164. To be sure, in some areas the law has long required that directors maintain internal controls to guard against wrongdoing. In particular, directors have an obligation to ensure that basic accounting practices are followed in preparing and auditing the firm's financial records. See, e.g., Atherton v. Anderson, 99 F.2d 883, 889 (6th Cir. 1938). Such precautions are relatively inexpensive. The company already may hire outside accountants to prepare the books, so it is relatively inexpensive also to require them to report on their procedures and findings to the board.
165. 698 A.2d 959 (Del. Ch. 1996).
166. Id. at 970.
167. Id. at 961.
168. Id.
169. Id. at 961-62.
170. Id. at 962.
171. Id. at 963-64.
172. See id. at 964.
173. Id. at 960-61.
174. Id. at 964.
175. See id. at 966 (summarizing the proposed settlement terms);
176. see also id. at 972 ("The proposed settlement provides very modest benefits.").
177. See id. at 961 (noting that the court was obliged "to assess the strengths and weaknesses of the claims asserted in light of the discovery record and to evaluate the fairness and adequacy of the consideration offered to the corporation in exchange for the release of all claims made or arising from the facts alleged");
178. BAINBRIDGE, supra note 36, at 381 (discussing the judicial approval requirement).
179. Caremark, 698 A.2d at 972.
180. See supra text accompanying note 114.
181. Caremark, 698 A.2d at 967.
182. Id.
183. Id. at 971 (alteration in original).
184. See id. at 968.
185. See, e.g., id. at 968-69.
186. Id. at 969.
187. Id.
188. Id. at 969-70.
189. Interestingly, the drafters of the Model Business Corporation Act (MBCA) chose to codify a standard closer to Graham than Caremark. Under MBCA section 8.31, a director may be held liable for sustained inattention only when "particular facts and circumstances . . . materialize that" would put "a reasonably attentive director" on notice of the need for further inquiry. MODEL BUS. CORP. ACT §8.31(a)(2)(iv) (2005). Under the MBCA, it therefore appears that proactive vigilance is not required.
190. See id. §8.01 cmt. ("Directors should not be held personally responsible for actions or omissions of officers, employees, or agents of the corporation so long as the directors have relied reasonably upon these officers, employees, or agents . . . .").
191. See, e.g., Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003) (opining that "the Caremark decision is rightly seen as a prod towards the greater exercise of care by directors in monitoring their corporations' compliance with legal standards");
192. see also Paul H. Dawes, Understanding the Fiduciary Duty of Oversight After McCall v. Scott, in SECURITIES LITIGATION 141, 157 (PLI Corporate Law and Practice, Course Handbook Series 2001) ("The decision in Caremark was widely accepted as the modern benchmark for the duty of oversight.").
193. 911 A.2d 362 (Del. 2006) (en banc).
194. Id. at 364.
195. See id. at 365.
196. See id. at 364.
197. Id. at 367, 370.
198. For discussion of the demand requirement in derivative litigation, see BAINBRIDGE, supra note 36, at 385-94.
199. Stone v. Ritter, 2006 WL 302558 (Del. Ch. Jan. 26, 2006).
200. Stone, 911 A.2d 362.
201. In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006). In August 1995, Michael Ovitz was hired by the Walt Disney Company to serve as president for five years.
202. Id. at 35. Ovitz had been the leading partner and one of the founders of Creative Artists Agency, which had generated an annual income of over $20 million for Ovitz.
203. Id. at 36.
204. 906 A.2d 27.
205. See id. at 35.
206. Id. at 41, 45-46. Ovitz's employment agreement provided for a base salary of $1.25 million, a discretionary bonus, and two sets of stock options that would collectively enable Ovitz to purchase five million shares of Disney common stock.
207. Id. at 37, 40. The agreement also provided for two ways in which Ovitz could be fired. Id. Before the end of the employment term, Disney could fire Ovitz for "good cause" only if Ovitz resigned voluntarily or if Ovitz committed gross negligence or malfeasance.
208. Brehm v. Eisner, 746 A.2d 244, 250 (Del 2000). Disney would owe Ovitz no additional compensation if it terminated him for "good cause." Id. Termination without cause (no-fault termination) would entitle Ovitz to the present value of his remaining salary payments through September 30, 2000, a $10 million severance payment, an additional $7.5 million for each fiscal year remaining under the agreement, and the immediate vesting of the first three million stock options.
209. Id.
210. Disney, 906 A.2d at 35.
211. See Sarah Helene Duggin & Stephen M. Goldman, Restoring Trust in Corporate Directors: The Disney Standard and the "New" Good Faith, 56 AM. U. L. REV. 211 (2006) (stating that in "Disney V the court had the wisdom to provide guidance to the bar, and to the corporate world by shining a light on a duty 'shrouded in the fog of. . . hazy jurisprudence'" (quoting Disney, 906 A.2d at 63 n.98)).
212. 906 A.2d at 67. The court made clear that these three categories of conduct were merely the "most salient" forms of bad faith, but did not constitute an exclusive definition of bad faith. Id.
213. Id. at 52.
214. Id. at 67 n.112.
215. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d362, 369 n.29 (Del. 2006).
216. See supra text accompanying note 33.
217. Stone, 911 A.2d at 370 (stating that "good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty").
218. 823 A.2d 492 (Del. Ch. 2003).
219. Stone, 911 A.2d at 370.
220. Id.
221. (quoting Guttman, 823 A.2d at 506 n.34).
222. To be sure, subsuming good faith into loyalty is logical in the limited sense that the set of cases in which one acts in bad faith as defined by the court without being motivated by conflicted interests is likely to be empty or nearly so. As Larry Ribstein observed: It follows that the only way a board is going to be held liable for breach of fiduciary duty when it isn't self-dealing is to (1) really not have any idea what it is doing; and (2) not have a 102(b)(7) clause in the charter; or (3) have such a clause but proceed in conscious disregard of the board's responsibility, which would be truly puzzling in the absence of self-dealing. In other words, the board will be liable for non-self-dealing conduct on a cold day in August in Miami under a blue moon. The Disney Affirmance: The End of the SOX Era?, http://busmovie. typepad.com/ideoblog/2006/06/the_disney_affi.html (June 8, 2006, 10:08 PST).
223. Stone, 911 A.2d at 369
224. (quoting In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959,971(Del. Ch. 1996)).
225. See, e.g., Cede 6k Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993) (holding that "a shareholder plaintiff, to establish a breach of duty of loyalty, must present evidence that the director either was on both sides of the transaction or 'derivefd] any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally'" (citation omitted) (emphasis omitted)
226. (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984))).
227. See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) ("If an officer or director of a corporation, in violation of his duty as such, acquires gain or advantage for himself, the law charges the interest so acquired with a trust for the benefit of the corporation, at its election, while it denies to the betrayer all benefit and profit.").
228. See generally Marciano v. Nakash, 535 A.2d 400, 403-04 (Del. 1987) (discussing the conditions under which an interested director transaction may be voidable).
229. In re Walt Disney Co., No. CIV. A. 15452, 2004 WL 2050138 at *5 n.51 (Del. Ch. Sept. 10, 2004).
230. Indeed, the court did so explicitly. See supra note 159.
231. See, e.g., Oliver v. Boston Univ., 2006 WL 1064169 (Del. Ch. 2006) ("If corporate fiduciaries stand on both sides of a challenged transaction, an instance where the directors' loyalty has been called into question, the burden shifts to the fiduciaries to demonstrate the 'entire fairness' of the transaction.").
232. Christopher Robinette explained: [B]ecause corrective justice seeks to right moral imbalances, it is first necessary to determine that such imbalances exist. If a defendant has not caused harm to a plaintiff, no moral imbalance exists; no wrong has been done by the defendant to the plaintiff. Thus, the causation requirement is a necessary part of corrective justice. Christopher J. Robinette, Torts Rationales, Pluralism, and Isaiah Berlin, 14 GEO. MASON L. REV. 329, 352 (2007).
233. 634 A.2d 345 (Del. 1993).
234. See id. at 367-69.
235. Cinerama, Inc. v. Technicolor, Inc., CIV.A. No. 8358, 1991 WL 111134, at *3 (Del. Ch. June 24, 1991),
236. rev'd sub nom. Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993).
237. 298 F. 614 (S.D.N.Y. 1924). See generally BAINBRIDGE, supra note 36, at 288-90, on which the following paragraphs draw.
238. Cinerama, 1991 WL 111134, at *3.
239. Technicolor, 634 A.2d at 370 n.38.
240. ROBERT C. CLARK, CORPORATE LAW 126 (1986).
241. STEVEN EMANUEL, CORPORATIONS (1989).
242. ROBERT W. HAMILTON, THE LAW OF CORPORATIONS 309 (3d ed. 1991).
243. EMANUEL, supra note 175, at 128 (emphasis omitted).
244. See supra note 26.
245. Cede 6k Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
246. In Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the court described the entire fairness standard as placing on the director-defendants the burden of proving, subject to "careful scrutiny by the courts," "their utmost good faith and the most scrupulous inherent fairness of the bargain."
247. Id. at 710.
248. MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 250 (1995).
249. See supra notes 46-47 and accompanying text.
250. See generally DOOLEY, supra note 180, at 249-54 (criticizing Technicolor).
251. For a careful demonstration that Technicolor's importation of entire fairness into the duty of care was a doctrinal novelty, see Lyman Johnson, Rethinking Judicial Review of Director Care, 24 DEL. J. CORP. L. 787, 799-01 (1999). Johnson concluded there is "no clear and reasoned prior authority" supporting Technicolor in this respect.
252. Id. at 801.
253. Weinberger, 457 A.2d at 715.
254. DOOLEY, supra note 180, at 256.
255. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 (Del. 2006) (en banc).
256. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64 (Del. 2006).
257. Id. at 66.
258. Id. at 64.
259. Id. at 64-66.
260. DEL. CODE ANN. tit. 8, §102(b)(7) (2001).
261. Veasey & Di Guglielmo, supra note 21, at 1432.
262. DEL. CODE ANN. tit. 8, §102(b)(7).
263. Malpiede v. Townson, 780 A.2d 1075, 1095 n.71 (Del. 2001).
264. Emerald Partners v. Berlin, 787 A.2d 85, 92 (Del. 2001).
265. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 65 (Del. 2006).
266. Id.
267. Griffith, supra note 20, at 14 (footnotes omitted).
268. Accord Bruner, supra note 30, at 1147 (stating that "the structure ultimately adopted in section 102(b)(7) tends to characterize [bad faith, reckless, and intentional misconduct] as their own categories of fiduciary breach somehow distinct from the concept of disloyalty" (emphasis omitted)).
269. Chief Justice Myron T. Steele, Delaware Supreme Court, Is Good Faith a Viable Standard of Conduct for Corporate Governance, or Vehicle for Second-Guessing by Hindsight?, Remarks at the Third Annual Symposium on the Law of Delaware Business Entities 6 (October 5, 2006), available at http://www.blogs.law.harvard.edu/corpgov/2007/05 (follow "here" hyperlink under "Chief Justice Steele's Remarks on the Duty of Good Faith"). The Chief Justice further argued that if good faith truly is the absence of intentional wrongdoing, the absence of bad faith, which we probably could all agree is intentional wrongdoing, or intentional acts of omission that cause harm, how do we deal with the language in 102(b)(7) that seems to say that intentional conduct is something different than the exercise of good faith?
270. Id. at 6-7.
271. See Bruner, supra note 30, at 1155.
272. Id.
273. Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).
274. See supra Part I.B.
275. Steele, supra note 198, at 13.
276. See supra text accompanying note 185.
277. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 65 (Del. 2006).
278. See supra text accompanying note 150.
279. See supra Part III.A.3.a.
280. DEL. CODE ANN. tit. 8, §102(b)(7)(ii) (2001).
281. Id.;
282. see supra text accompanying note 197.
283. See, e.g., Lewis v. Aronson, 466 A.2d 375, 384 (Del. Ch. 1983) (holding that "the rule is a presumption that a rational business decision of the officers or directors of a corporation is proper unless there exists facts which remove the decision from the protection of the rule-such as self-dealing, conflict of interest, fraudulent, illegal or reckless decisions, waste of corporate assets, etc."),
284. rev'd on other grounds, 473 A.2d 805 (Del. 1984).
285. See Bainbridge, supra note 26, at 95-100 (arguing that the business judgment rule is not properly understood as a standard of liability).
286. Cf. 1 AM. LAW INST., supra note 39, §4.01 cmt. d ("To be successful in a duty of care action involving noncompliance with law, a plaintiff is required to prove two violations: first, the plaintiff must establish a corporation's violation of the law, and second, the plaintiff must establish that the defendant director or officer failed to comply with the standards of §4.01 [the duty of care] with respect to the violation.").
287. For this reason, the fact that section 102(b)(7) excludes exculpation of knowing violations of law, DEL. CODE ANN. tit. 8, §102(b)(7)(ii), does not mandate adoption of a per se rule of director liability in connection with such acts. Section 102(b)(7) was not intended to create a standard of liability, but rather to ensure that liability arising out of the duty of care could be exculpated.
288. See supra notes 192-196 and accompanying text (discussing the purpose behind section 102(b)(7)). If conduct involving a knowing violation of law does not breach the duty of care, the exculpation provisions authorized by section 102(b)(7) should not come into play. By treating such conduct as bad faith, however, the court effectively adopted a rule of per se liability.
289. See infra text accompanying notes 222-223.
290. The following analysis is taken from BAINBRIDGE, supra note 36, at 272-73.
291. BLACK'S LAW DICTIONARY 401 (pocket ed. 1996).
292. See James D. Cox, Compensation, Deterrence, and the Market as Boundaries for Derivative Suit Procedures, 52 GEO. WASH. L. REV. 745, 765 (1984) (discussing the net loss rule).
293. There is an active debate over the appropriateness of corporate criminal liability, but that debate is beyond the scope of this Article. For commentary on that issue, see, for example, Norwood P. Beveridge, Does the Corporate Director Have a Duty Always to Obey the Law?, 45 DEPAUL L. REV. 729 (1996);
294. V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 HARV. L. REV. 1477 (1996);
295. William S. Laufer, Corporate Liability, Risk Shifting, and the Paradox of Compliance, 52 VAND. L. REV. 1343 (1999).
296. See, e.g., Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) ("Courts do not measure, weigh or quantify directors' judgments. We do not even decide if they are reasonable in this context.").
297. BAINBRIDGE, supra note 36, at 367.
298. Id. at 403.
299. Id.
300. There is an analogy here to the tort law doctrine of negligence per se. In tort law, many courts hold that the presumption of negligence made when the defendant violated some statute can be rebutted by a showing that the defendant acted reasonably under the circumstances despite the violation. W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 230 (5th ed. 1984);
301. see id. at 231 ("The arbitrary classification of all breaches of statute as negligence per se or no negligence at all leaves too little flexibility for the standard of reasonable care.").
302. See supra notes 167-184 and accompanying text.
303. In a post-Stone decision, Vice Chancellor Strine held: In short, by consciously causing the corporation to violate the law, a director would be disloyal to the corporation and could be forced to answer for the harm he has caused. Although directors have wide authority to take lawful action on behalf of the corporation, they have no authority knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from criminal and civil regulators. Delaware corporate law has long been clear on this rather obvious notion; namely, that it is utterly inconsistent with one's duty of fidelity to the corporation to consciously cause the corporation to act unlawfully. The knowing use of illegal means to pursue profit for the corporation is director misconduct. Desimone v. Barrows, 924 A.2d 908, 934-35 (Del. Ch. 2007) (footnote omitted).
304. See Larry E. Ribstein, Perils of Criminalizing Agency Costs (111. Law and Econ. Working Paper Series, Working Paper No. LE06-021, 2006), available at http://ssrn.com/abstract=920140 (discussing the use of criminal law to enforce norms of corporate governance).
305. The American Law Institute's 1994 Principles of Corporate Governance state that the de minimis principle applies here as elsewhere in the law. Similarly, there may be isolated cases in which it is widely understood that liability is properly viewed as a price of noncompliance. In general, knowing noncompliance by a corporation should be treated no differently than knowing noncompliance by a natural person. 1 AM. LAW INST., supra note 39, §2.01 cmt. g.
306. See supra notes 113-136 and accompanying text.
307. 698 A.2d 959 (Del. Ch. 1996).
308. Id. at 969-70.
309. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 365 (Del. 2006) (en banc).
310. Id. at 369
311. (quoting In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006)).
312. Id.
313. Caremark, 698 A.2d at 971.
314. Id. at 967 (emphasis added).
315. Id. (emphasis added).
316. Id. (emphasis added).
317. Id. (emphasis added) (emphasis omitted) (footnote omitted). Notice, by the way, how Disney's decision to give good faith substantive content departs from Allen's emphasis on process. Likewise, the decision to do so flies in the face of Brehm's command that "substantive due care" is a concept "foreign to the business judgment rule. . . . Due care in the decisionmaking context is process due care only."
318. Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000).
319. Caremark, 698 A.2d at 968 (emphasis added).
320. Id. at 970 (emphasis added).
321. Id. at 971 (emphasis added).
322. id. at 967.
323. There was no pressing doctrinal need to create a new analytical category for such conduct as "conscious disregard of a known duty," which could have been analyzed under the existing duty of care. By way of analogy, in tort law, willful and wanton conduct is treated as a species of negligence. KEETON ET AL., supra note 221, at 212. In other words, such conduct is a violation of the tort law duty of care.
324. Similarly, in the punitive damage context, courts sometimes use the term "gross negligence" to refer to "conduct that is sufficiently outrageous to support an inference of conscious disregard of a duty." Mary Jane Morrison, Getting a Rule Right and Writing a Wrong Rule: The IRS Demands a Return on All Punitive Damages, 17 CONN. L. REV. 39, 62 (1984).
325. Of course, gross negligence is the Delaware standard for duty of care in corporate law. See supra note 103. As a final example, in insurance law, to show that the insurer acted in bad faith, one must show that the insurer's actions were "willful, wanton and in conscious disregard of [its] duty to pay plaintiffs insurance claim."
326. Von Hagel v. Blue Cross 6k Blue Shield, 370 S.E.2d 695, 699 (N.C. Ct. App. 1988). Note again how conscious disregard of duty is linked to willful and wanton conduct rather than personal benefit. AU of these examples show that the conduct at issue in Caremark properly could have been analyzed under the existing duty of care doctrines. There was no doctrinal need to reinvent those duties as a species of good faith or to subsume them into the ill-fitting duty of loyalty.
327. See McCall v. Scott, 250 F.3d 997, 999 (6th Cir. 2001) (applying Delaware law).
328. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (en banc).
329. See supra Part III.A.3.a (discussing the role of section 102(b)(7) in the evolution of the good faith doctrine).
330. Admittedly, there had been pre-Stone signals in the case law suggesting that a convergence of good faith, loyalty, and oversight might be impending. In Disney, for example, Chancellor Chandler cited an influential article by Lyman Johnson situating noncare breaches of good faith in the loyalty domain: It is precisely in this context-an imperial CEO or controlling shareholder with a supine or passive board-that the concept of good faith may prove highly meaningful. The fiduciary duties of care and loyalty, as traditionally defined, may not be aggressive enough to protect shareholder interests when the board is well advised, is not legally beholden to the management or a controlling shareholder and when the board does not suffer from other disabling conflicts of interest, such as a patently self-dealing transaction. Good faith may serve to fill this gap and ensure that the persons entrusted by shareholders to govern Delaware corporations do so with an honesty of purpose and with an understanding of whose interests they are there to protect. In a thoughtful article, Professor Lyman Johnson has written about the richer historical and literary understanding of loyalty and care, beyond their more narrow "non-betrayal" and "process" uses in contemporary jurisprudence. Professor Johnson's description of a more expansive duty of loyalty to encompass affirmative attention and devotion may, in my opinion, fit comfortably within the concept of good faith (or vice versa) as a constituent element of the overarching concept of faithfulness. In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 760 n.487 (Del. Ch. 2005)
331. (citing Lyman P.Q. Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 DEL. J. CORP. LAW 27 (2003)).
332. Likewise, in Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003), Vice Chancellor Strine indicated that "there is no case in which a director can act in subjective bad faith towards the corporation and act loyally."
333. Id. at 506 n.34. For the reasons set forth in this Article, however, we believe that these cases suffer from the same problems as Stone.
334. Stone, 911 A.2d at 370. Here, liability likely will arise only where there are alleged "red flags" that are '"either waived [sic] in one's face or displayed so that they are visible to the careful observer.'"
335. Rattner v. Bidzos, No. CIV.A.19700, 2003 WL 22284323, at *13 (Del. Ch. Oct. 7, 2003)
336. (quoting In re Citigroup Inc. S'holders Litig., No. 19827, 2003 WL 21384599, at *2 (Del. Ch. June 5, 2003)).
337. In re Caremark lnt'1 Inc. Derivative Litig., 698 A.2d 959, 968 (Del. Ch. 1996).
338. Id. at 967 (emphasis omitted).
339. Id. at 970 n.27.
340. See supra text accompanying note 242.
341. See supra text accompanying note 239.
342. See supra text accompanying notes 109-110.
343. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (en banc).
344. Id. (emphasis added).
345. Id.
346. See supra text accompanying notes 232-239.
347. The hypothetical thus suggests the potential application of DGCL section 141(e), which provides that directors shall be "fully protected" when they properly rely on certain internal or external advisors. DEL. CODE ANN. tit. 8, §141(e) (2001). The potential application of that defense to the problem at hand, however, is beyond the scope of this Article.
348. Where a plaintiff can show that the board of directors was grossly negligent in failing to inform itself of all '"material information reasonably available to [it],'" the business judgment rule will not protect the decision. Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)
349. (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)).
350. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 970 (Del. Ch. 1996) ("Obviously the level of detail that is appropriate for such an information system is a question of business judgment.").
351. See supra text accompanying note 127.
352. See supra Part III.B.2.a.
353. Caremark, 698 A.2d at 967 (emphasis omitted).
354. Id. at 967-68 (emphasis omitted) (footnotes omitted).
355. Cf. Rabkin v. Philip A. Hunt Chem. Corp., 1987 WL 28436, at *3 (Del. Ch. Dec. 17, 1987) (holding that "a conscious decision as to the types of information provided to the directors would fall within the protection of the business judgment rule as a general matter").
356. See supra Part III.A.3.b. Apropos of that discussion, if the board has discretion to violate the law in appropriate cases, it would follow a fortiori that the board has discretion in appropriate cases to not adopt programs intended to promote law compliance.
357. See supra text accompanying note 11.
358. See supra note 48.
359. 283 A.2d 693 (Del. Ch. 1971).
360. In Puma v. Marriott, the five disinterested directors of Marriott Corporation unanimously approved the purchase of six other companies owned by the majority shareholder of Marriott Corporation, the Marriott family.
361. Id. at 694.
362. In light of their approval, the court applied the business judgment rule to the self-interested transaction. Id. at 696.
363. 535 A.2d 400 (Del. 1987).
364. Id. at 405 n.3.
365. See supra note 236 (discussing how the definition of good faith is inconsistent with prior Delaware precedent emphasizing that courts do review the merits of most board decisions).
366. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (en banc).
367. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959, 970 (Del. Ch. 1996).
368. See supra notes 167-184 and accompanying text.
369. Desimone v. Barrows, 924 A.2d 908, 935 n.95 (Del. Ch. 2007).
370. 31 U.S.C.§ 5318(h) (2003).
371. Caremark, 698 A.2d at 971 (emphasis omitted).
372. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006) (en banc).