Loyalty's core demand: The defining role of good faith in corporation law

Georgetown Law Journal

Volumn 98, Issue 3, 2010, Pages 629-696

  Strine Jr , Leo E ^a   Hamermesh, Lawrence A ^b   Franklin Balotti, R ^c   Gorris, Jeffrey M ^d  

^a UNIVERSITY OF PENNSYLVANIA LAW SCHOOL   (United States)

^b Widener University School of Law   (United States)

^c UNIVERSITY OF MIAMI   (United States)

^d NONE

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[No Author keywords available]

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EID: 77951863338     PISSN: 00168092     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (473)

1. 634 A.2d 345, 361 (Del. 1993) (emphasis omitted).
2. See, e.g., Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1, 11 (2006) ("In short, the duty of good faith has long been both explicit and implicit in corporation statutes and implicit in case law. Recently, it has become explicit in case law as well.");
3. Hillary A. Sale, Delaware's Good Faith, 89 CORNELL L. REV. 456, 494 (2004) (advocating the need for "a separate good faith duty" to address "those outrageous and egregious abdications of fiduciary behavior that are not simply the results of bad process or conflicts");
4. see also Claire A. Hill & Brett H. McDonnell, Disney, Good Faith, and Structural Bias, 32 J. CORP. L. 833, 833 (2007) (suggesting "an extension of the duty of good faith" by having "courts articulate a doctrine requiring more scrutiny of decisions made in an environment of structural bias");
5. Elizabeth A. Nowicki, Not in Good Faith, 60 SMU L. REV. 441, 491 (2007) (arguing that an "exacting definition of the phrase 'not in good faith,"' which describes conduct by directors that cannot be exculpated under section 102(b)(7), "is needed to ensure directors are held accountable for meeting their good faith obligation");
6. cf. Carter G. Bishop, Directorial Abdication and the Taxonomie Role of Good Faith in Delaware Corporate Law, 2007 MICH. ST. L. REV. 905, 937 ("By imposing a positive duty of devotion upon directors, expanded loyalty fills the gap sought to be filled by the more amorphous concept of bad faith."). Other scholars have made important contributions to the discussion but without embracing the triad.
7. See, e.g., Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law, 41 WAKE FOREST L. REV. 1131 (2006);
8. Andrew S. Gold, The New Concept of Loyalty in Corporate Law, 43 U.C. DAVIS L. REV. 457 (2009);
9. Andrew C.W. Lund, Opting Out of Good Faith, 37 FLA. ST. U. L. REV. (forthcoming 2010).
10. DEL. CODE ANN. tit. 8, §102(b)(7) (2001). Section 102(b)(7) provides that a corporation's charter may include [a] provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under §174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
11. Id.
12. See, e.g., Eisenberg, supra note 2, at 23 ('"[G]ood faith in law ... is not to be measured always by a man's own standard of right, but by that which [the law] has adopted and prescribed as a standard for the observance of all men in their dealings with each other.' Indeed, in law generally, the objective elements of good faith dominate the subjective element."
13. (quoting First Nat'l Bank of Chi. v. F.C. Trebein Co., 52 N.E. 834, 837 (Ohio 1898)));
14. Nowicki, supra note 2, at 469 (arguing that section 102(b)(7) states that directors may not be exculpated for acts or omissions "not in good faith" and that "[m]ental state is irrelevant" to the determination of whether an act is "not in good faith");
15. cf. Ethan G. Stone, Business Strategists and Election Commissioners: How the Meaning of Loyalty Varies with the Board's Distinct Fiduciary Roles, 31 J. CORP. L. 893, 898-99 (2006) ("My reason for equating 'good faith' with the core fiduciary duty of loyalty is to emphasize that the liability rules commonly called the duty of loyalty are evidentiary shortcuts to proving violations of this basic duty. It is very difficult to prove that a fiduciary acted for an improper purpose. Courts have, accordingly, identified objective conflicts of interest that cast enough doubt on a fiduciary's motives to establish a 'per se' case for breach without any need to convince the judge of the fiduciary's actual state of mind. It is these easy cases for disloyalty that have come to define the duty itself.").
16. See, e.g., Eisenberg, supra note 2, at 72 ("The terms 'intentional' and 'conscious,' as used in [Disney IV's statement of the standard for good faith] and some other tests, need interpretation. The formulations that employ these terms would make little or no sense unless they mean either that the manager was conscious that he was disregarding his duties or that a reasonable person in the manager's position would have known that he was disregarding his duties-not that the actual manager was subjectively conscious that he was disregarding his duties.").
17. 911 A.2d 362 (Del. 2006). More recently, the Delaware Supreme Court has reaffirmed its holding in Stone. Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243-44 (Del. 2009) (holding that directors supervising the sale of the company may breach their duty of care if they "fail[] to do all that they should ... under the circumstances," but they breach their duty of loyalty only "if they knowingly ... fail[] to undertake their responsibilities").
18. Stone, 911 A.2d at 370.
19. See, e.g., Stephen M. Bainbridge et al., The Convergence of Good Faith and Oversight, 55 UCLA L. REV. 559, 604-05 (2008) (worrying that after Stone v. Ritter "a conscious decision by the board of directors that the costs of a law compliance program outweigh the benefits may no longer be protected by the business judgment rule" and that "the Stone court arguably disallows director liability in the paradigm case in which a board over a sustained period of time simply failed to even consider whether a law compliance program was necessary");
20. Eric A. Chiapinelli, New Developments: Delaware Supreme Court on Good Faith (Again) and the Duties of Care and Loyalty, http://businessentitiesonline. ' typepad.com/new-developments/2006/11/delaware-suprem.html (Nov. 8, 2006, 9:52 a.m.) (expressing concern that after Stone v. Ritter the "the duty of care may, in fact, be or become chimerical");
21. Posting of Gordon Smith to The Conglomerate, http://www.theconglomerate. org/2007/01/good-faith-care.html (Jan. 3,2007)
22. (questioning why it was necessary for Stone v. Ritter to place the duty of good faith under the duty of loyalty when Disney had already defined the duty of good faith and distinguished it from the duty of care).
23. But see Gold, supra note 2, at 527 ("Three independent fiduciary duties-care, loyalty, and good faith-made for a confusing mix. A truly independent good faith duty was frustratingly unclear in scope. By bringing the fiduciary duty of good faith within the duty of loyalty, the available meanings for good faith are constrained by the idea of loyalty.");
24. Claire A. Hill & Brett H. McDonnell, Stone v. Ritter and the Expanding Duty of Loyalty, 76 FORDHAM L. REV. 1769, 1770 (2007) ("Stone opens the door to a more analytically satisfactory articulation of the standard of liability for breach of fiduciary duty.").
25. See infra text accompanying note 31 and section II.D.
26. Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987) ("This involves duties of loyalty and care. The former embodies not only an affirmative duty to protect the interests of the corporation, but also an obligation to refrain from conduct which would injure the corporation and its stockholders or deprive them of profit or advantage. In short, directors must eschew any conflict between duty and self-interest.
27. Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 510 (1939);
28. Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701, 710 (1983). They cannot succumb to influences which convert an otherwise valid business decision into a faithless act.
29. [Aronson v. Lewis, 473 A.2d 805, 816 (1984)]");
30. In re The Walt Disney Co. Derivative Litig. ("Disney III), CA. No.15452, 2004 WL 2050138, at *5 n.49 (Del. Ch. Sept. 10, 2004) ("[A]s this Court previously stated, the 'duty of loyalty ... imposes an affirmative obligation to protect and advance the interests of the corporation and mandates that [a director] absolutely refrain from any conduct that would harm the corporation. This duty has been consistently defined as 'broad and encompassing,' demanding of a director 'the most scrupulous observance.' To that end, a director may not allow his self-interest to jeopardize his unyielding obligations to the corporation and its shareholders."
31. (quoting BelCom, Inc. v. Robb, C.A. No. 14663, 1998 WL 229527, at *3 (Del. Ch. Apr. 28, 1998))). The proposition that the fiduciary duty of directors has an affirmative aspect is long-standing.
32. See, e.g., Aberdeen Ry. Co. v. Blaikie Bros., [1854] 1 Macq. 461 (H.L.) (appeal taken from Scot.) (U.K.) ("The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting."),
33. quoted in Cumberland Coal & Iron Co. v. Sherman, 30 Barb. 553, 568 (N.Y. Gen. Term 1859);
34. Cumberland Coal & Iron Co., 30 Barb, at 570 ("Those who assume the position of directors ... , assume also the obligations which the law imposes on such a relation. The stockholders confide to their integrity, to their faithfulness, and to their watchfulness, the protection of their interests.");
35. 1 THOMAS W. WATERMAN, A TREATISE ON THE LAW OF CORPORATIONS 420 (New York, Baker, Voorhis & Co. 1888) (embracing Aberdeen in describing the directors' duties).
36. See generally Lyman Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 DEL. J. CORP. L. 27 (2003) (providing an incisive analysis that demonstrates that the duty of loyalty includes the concept of affirmative attention and devotion in addition to nonbetrayal).
37. E.g., Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1988) (contending that the loyalty principles articulated in Guth, 5 A.2d at 510, "demand that corporate fiduciaries ... affirmatively protect and defend those interests entrusted to them ... [and] must exert all reasonable and lawful efforts to ensure that the corporation is not deprived of any advantage to which it is entitled");
38. HENRY WINTHROP BALLANTINE, BALLANTINE ON CORPORATIONS 359 (1927) ("It is important that directors realize the responsibility which they assume. They are expected to exercise an active and vigilant supervision over the officers of the company. They are expected to be familiar with the requirements of the by-laws of the corporation and enforce them. They are supposed to take the usual methods to inform themselves of the true condition of the affairs of the company.");
39. id. at 360 ("The director of a corporation cannot remain silent, when he knows that a fraud is being attempted against the corporation and ultimately against its shareholders. It is his duty ... to use every effort to prevent the consummation of the fraud. If he permits by passive acquiescence any part of the assets of the corporation to be fraudulently diverted or secret profits to be obtained he is guilty of a neglect of duty to the corporation for which he is liable in damages, notwithstanding the fact that he did not profit financially thereby.").
40. See Gagliardi v. Trifoods Int'l, Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996) (Chancellor Allen stating that "I start with what I take to be an elementary precept of corporation law: in the absence of facts showing self-dealing or improper motive, a corporate officer or director is not legally responsible to the corporation for losses that may be suffered as a result of a decision that an officer made or that directors authorized in good faith");
41. STEPHEN M. BAINBRIDGE, CORPORATE LAW ch. 5 (2d ed. 2009) (arguing that the business judgment rule should be used to cause courts to abstain from reviewing whether disinterested directors made a decision with reasonable care, and articulating the policy reasons why a disinterested director's duty of care should not be enforceable by way of a monetary damage award); Bruner, supra note 2, at 1177 ("The Delaware legislature should establish by statute that monetary liability may not be imposed on corporate directors for breach of the 'duty of care,' but that monetary liability may be imposed for breach of the 'duty of loyalty,' defined to include cases involving financial conflicts of interest, other improper personal benefits, conscious malfeasance, and conscious nonfeasance.");
42. Daniel R. Fischel, The Business Judgment Rule and the Trans Union Case, 40 Bus. LAW. 1437, 1441 (1985) (contending that the business judgment rule should preclude judicial review of a director's decisions to acquire information before making decisions because, among other things, "liability rules should be relatively unimportant" where it is difficult to distinguish between performance and breach of fiduciary duty);
43. Reiner Kraakman & Jay Kesten, The Story of Francis v. United Jersey Bank;
44. When a Good Story Makes Bad Law, in CORPORATE LAW STORIES 163, 186 (J. Mark Ramseyer ed., 2009) (asserting that Francis was "wrongly decided, both by traditional standards and by the standards of good corporate law policy" because it "broke with the time-honored tradition of insulating negligent directors from liability in almost all cases");
45. Kenneth E. Scott, Corporation Law and the American Law Institute Corporate Governance Project, 35 STAN. L. REV. 927, 937 (1983) (arguing that "very little of any value would be lost by outright abolition of the legal duty of care and its accompanying threat of a lawsuit" and that many benefits would result, including "savings in litigation expense, insurance premiums, unnecessary record building, and risk-averse decisionmaking by the 'board," as well as the opportunity for the law to more effectively and efficiently address duty of loyalty claims).
46. See Barnes v. Andrews, 298 F. 614, 618 (S.D.N.Y. 1924) ("Directors are not specialists, like lawyers or doctors. They must have good sense, perhaps they must have acquaintance with affairs; but they need not-indeed, perhaps they should not-have any technical talent. They are the general advisers of the business, and if they faithfully give such ability as they have to their charge, it would not be lawful to hold them liable.").
47. See, e.g., Franklin A. Gevurtz, The Business Judgment Rule: Meaningless Verbiage or Misguided Notion, 67 S. CAL. L. REV. 287, 327 (1994) ("The bottom line is that utilizing the business judgment rule to insulate directors from liability for ordinary negligence creates differences in treatment between individuals which cannot be explained by any policy justifications.");
48. D.A. Jeremy Telman, The Business Judgment Rule, Disclosure, and Executive Compensation, 81 TUL. L. REV. 829, 853 (2007) ("[JJt is not clear why directors should not be held to an ordinary negligence standard."). The early treatise writers reflected the same divergent viewpoints that exist modemly on whether directors should be held culpable for mere negligence, gross negligence, or any breach of care not accompanied by an improper state of mind.
49. Compare BALLANTINE, supra note 12, at 362 (stating that directors "are not merely bound to be honest;
50. they must also be diligent and careful in performing the duties they have undertaken. They cannot excuse imprudence on the ground of... the honesty of their intentions"), id. at 359 (explaining that the liability of directors "is not limited to wilful breaches of trust or excess of power, but extends also to negligence"),
51. id. at 361 (advocating a simple negligence standard requiring the directors to have acted with the care and diligence that would be expected of ordinarily careful and diligent persons acting under similar circumstances),
52. WM. L. CLARK, JR., HANDBOOK OF THE LAW OF PRIVATE CORPORATIONS 646 (3d ed. 1916) (stating that directors and officers are liable by "reason of negligence and inattention to duties of their trust, though there may be no actual bad faith"),
53. and id. at 648 ("Directors are liable if they suffer the corporate funds or property to be lost or wasted by gross negligence, and inattention to the duties of their trust, though there is no bad faith."),
54. with WILLIAM J. GRANGE, CORPORATION LAW FOR OFFICERS AND DIRECTORS: A GUIDE TO CORRECT PROCEDURE 410-11 (1935) ("A director is not hable for 'honest mistakes,' such as entering in good faith into a contract which afterwards turns out to be unprofitable. On the other hand, if a particular act authorized by the directors is so obviously foolish or absurd that it may be said to evince an entire lack of judgment or good sense, the courts will hold the directors accountable for the loss sustained. The question is one of degree, but where honesty, good faith, and a reasonable effort to perform his duties have been shown, the courts will go a long way in excusing a director's blunders."),
55. 2 ARTHUR W. MACHEN, JR., A TREATISE ON THE MODERN LAW OF CORPORATIONS §1533 (1908) ("The rule is that for any mere error of judgment directors are not ordinarily liable. Their negligence, it is said, in order to give the company a cause of action against them, must be 'crass' or 'gross.'"),
56. and HENRY OSBORN TAYLOR, A TREATISE ON THE LAW OF PRIVATE CORPORATIONS §620 (5th ed. 1902) ("Directors acting in good faith are not liable, in the absence of gross negligence, for doing what they have been authorized to do, even though it was imprudent; nor for errors in judgment in matters within the scope of their discretion, even when the errors seem palpable, and such as men of ordinary prudence would not have committed.").
57. Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985);
58. see also Lutz v. Boas, 171 A.2d 381, 395 (Del. Ch. 1961) (finding "grossly negligent directors" hable for failure to perform publicly stated supervisory functions and prevent misconduct by the mutual fund company's investment adviser);
59. cf. Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981) (embracing a negligence standard to address a claim that a director failed to monitor the operations of a reinsurance broker and was responsible for losses caused by the misappropriation of funds by her sons, the broker's other two directors).
60. See, e.g., Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (explaining that the "the basic teaching of [Revlon, as well as Unocal and Moran] is simply that the directors must act in accordance with their fundamental duties of care and loyalty");
61. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1284 n.34 (Del. 1988) ("In Ivanhoe, 535 A.2d at 1345, we made it abundantly clear that both [the duty of care and the duty of loyalty] were involved in Revlon, and that both had been breached.");
62. Ryan v. Lyondell Chem. Co., CA. No. 3176-VCN, 2008 WL 2923427, at *12 (Del. Ch. July 29, 2008) ("The so-called 'Revlon duties' are not unique fiduciary obligations, but they do guide a board in the discharge of its unyielding fiduciary duties of care and loyalty in the sale context."), rev'd on other grounds, 970 A.2d 235 (Del. 2009);
63. In re MONY Group Inc. S'holder Litig., 852 A.2d 9, 19 (Del. Ch. 2004) ("[T]he basic teaching of Revlon and its progeny is that the directors must act in accordance with their fundamental duties of care and loyalty." (citation and internal quotation marks omitted));
64. Wells Fargo & Co. v. First Interstate Bancorp, C.A. Nos. 14696, 14623, 1996 WL 32169, at *11 n.3 (Del. Ch. Jan. 18,1996) ('"Revlon duties' are not distinctive board duties at all, but a changed standard of judicial review. That is when 'Revlon duties' are triggered a burden will shift to the directors and the court will undertake more active review of the traditional directorial duties of care and loyalty under a reasonableness standard.");
65. QVC Network, Inc. v. Paramount Commc'ns, Inc., 635 A.2d 1245, 1267 (Del. Ch. 1993) ("The basic teaching of Revlon and Unocal is simply that the directors must act in accordance with their fundamental duties of care and loyalty." (citation and internal quotation marks omitted));
66. In re RJR Nabisco, Inc. S'holders Litig., C.A. No. 10389, 1989 WL 7036, at *4 (Del. Ch. Jan. 31, 1989) (*'[T]he Revlon case does not establish a basis for director liability or for the issuance of the protective remedy of injunction independent of the traditional bases for such liability or such relief: a breach of the duty of loyalty or of the duty of care with resulting injury.").
67. See, e.g., Zirn v. VLI Corp., 621 A.2d 773, 778 (Del. 1993) ("The requirement that a director disclose to shareholders all material facts bearing upon a merger vote arises under the duties of care and loyalty." (citation omitted)). The frequency with which the mantra has been repeated is evident from its inclusion in at least six cases during 2008 alone.
68. See Ryan, 2008 WL 2923427, at *19 n.113 (Del. Ch. July 29, 2008) ("The so-called duty of disclosure, of course, is not an independent fiduciary duty standing on the same footing as the fiduciary duties of care and loyalty." (citation omitted)), rev'd on other grounds, 970 A.2d 235 (Del. 2009);
69. Wayne County Employees' Ret. Sys. v. Corti, 954 A.2d 319, 330 (Del. Ch. 2008) ("The fiduciary duty of disclosure, which is a specific application of the duties of care and loyalty, requires that a board of directors disclose fully and fairly all material information within the board's control when it seeks shareholder action." (citations and internal quotation marks omitted));
70. David P. Simonetti Rollover IRA v. Margolis, C.A. No. 3694-VCN, 2008 Del. Ch. LEXIS 78, at *17-18 (Del. Ch. June 27, 2008) ("When the directors of a Delaware corporation seek shareholder action, they are bound by their fiduciary duties of due care and loyalty to disclose fully and fairly all material information within the board's control." (citation and internal quotation marks omitted));
71. Raymond Revocable Trust v. MAT Five LLC, C.A. No. 3843-VCL, 2008 WL 2673341, at *4 (Del. Ch. June 26, 2008) ("The duty of disclosure is not an independent duty, but derives from the duties of care and loyalty." (citation omitted));
72. In re Transkaryotic Therapies, Inc., 954 A.2d 346, 357 (Del. Ch. 2008) ("Although usually labeled and described as a duty, the obligation to disclose all material facts fairly when seeking shareholder action is merely a specific application of the duties of care and loyalty." (citations omitted));
73. Pfeffer v. Redstone, C.A. No. 2317-VCL, 2008 WL 308450, at *8 (Del. Ch. Feb. 1, 2008) ("The duty of disclosure is not an independent duty, but derives from the duties of care and loyalty." (citation omitted)). After Technicolor, the courts' verbal tic occasionally added reference to a duty of good faith (as well as care and loyalty), but without any apparent substantive significance or explication.
74. See Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998) ("The duty of directors to observe proper disclosure requirements derives from the combination of the fiduciary duties of care, loyalty and good faith." (citations omitted));
75. In re Lukens Inc. S'holders Litig., 757 A.2d 720, 731 (Del. Ch. 1999) ("'Revlon duties' refer only to a director's performance of his or her duties of care, good faith and loyalty in the unique factual circumstance of a sale of control over the corporate enterprise." (citation omitted)).
76. TW Servs., Inc. v. SWT Acquisition Corp., C.A. Nos. 10427, 10298, 1989 WL 20290, at *8 n.14 (Del. Ch. Mar. 2, 1989) ("[N]o matter what our model [of corporate law], it must be flexible enough to recognize that the contours of a duty of loyalty will be affected by the specific factual context in which it is claimed to arise ....").
77. Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. REV. 1009, 1015 (1997).
78. We claim, in fact, that Arsht's aphorism could be made even simpler by eliminating the explicit reference to illegality because we maintain that the loyalty-implementing concept of good faith requires managing the corporation's affairs in compliance with law. See infra section II.B.2.
79. DEL. CODE ANN. tit. 8, § 211(b) (2001).
80. Id. §242 (charter changes);
81. id. §151 (issuance of new classes of stock not previously provided for in the charter requires a charter amendment);
82. id. §251 (mergers);
83. id. §271 (sale of substantially all assets).
84. Without risk of facing any serious historical counter-argument, we can even safely state that the primary equitable duty that was thought to constrain directors until the issuance of the Van Gorkom decision in 1985 was the duty of loyalty.
85. Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Before that time, the duty of care had largely an admonitory, rather than enforceable, basis in American corporate law.
86. See, e.g., William T. Allen, The Corporate Director's Fiduciary Duty of Care and the Business Judgment Rule Under U.S. Corporate Law, in COMPARATIVE CORPORATE GOVERNANCE 307, 321 (Klaus J. Hopt et al. eds., 1998) ("The long history that was inconsistent with courts directly imposing liability on corporate directors for violation of the objective standard of care was interrupted by the decision of the Delaware Supreme Court in Smith v. Van Gorkom.");
87. 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) ("The search for cases in which directors of industrial corporations have been held liable in derivative suits for negligence uncomplicated by self-dealing is a search for a very small number of needles in a very large haystack.");
88. Henry Ridgely Horsey, The Duty of Care Component of the Delaware Business Judgment Rule, 19 DEL. J. CORP. L. 971, 977 (1994) ("Those who surveyed the duty of care case law in this country before the mid-eighties found an infertile field and were in nearly unanimous agreement as to their findings: the business judgment rule had been applied in such a manner as to constitute ah almost per se bar to shareholder claims of directors' breach of their fiduciary duty of care."
89. (citing Stuart R. Conn, Demise of the Director's Duty of Care: Judicial Avoidance of Standards and Sanctions Through the Business Judgment Rule, 62 TEX. L. REV. 591, 594 (1983))).
90. Although there are almost no cases holding directors liable for a breach of the duty of care, a number of early treatises suggest that distinguished commentators believed a cause of action for some form of negligence could be successful. The treatises are often confusing about the evidentiary standard that would be used. E.g., CLARK, supra note 15, at 646 (stating that directors and officers can be held liable "by reason of negligence and inattention to duties of their trust, though there may be no actual bad faith");
91. id. at 648 ("Directors are liable if they suffer the corporate funds to be lost or wasted by gross negligence, and inattention to the duties of their trust, though there is no bad faith.");
92. WILLIAM L. CLARK & WILLIAM L. MARSHALL, MARSHALL ON PRIVATE CORPORATIONS 1012-13 (1902) (stating that directors would not be liable for "mere mistake or errors of judgment, either of law or fact, or for nonfeasance or negligence, where they have brought to the discharge of their duties and exercised such a degree of attention, care, skill and judgment as ordinarily prudent and diligent men would exercise under similar circumstances");
93. GRANGE, supra note 15, at 410-411 ("A director is not liable for honest mistakes, such as entering in good faith into a contract which afterwards turns out to be unprofitable. On the other hand, if a particular act authorized by the directors is so obviously foolish or absurd that it may be said to evince an entire lack of judgment or good sense, the courts will hold the directors accountable for the loss sustained. The question is one of degree, but where honesty, good faith, and a reasonable effort to perform his duties have been shown, the courts will go a long way in excusing a director's blunders."). But for present purposes, whether that is or is not true is not of moment.
94. 285 A.2d 437,439 (Del. 1971).
95. A.A. Berle, Jr., Corporate Powers as Powers in Trust, 44 HARV. L. REV. 1049 (1931).
96. A.A. Berle, Jr., For Whom Corporate Managers Are Trustees: A Note, 45 HARV. L. REV. 1365, 1371 (1932).
97. Berle, supra note 26, at 1049.
98. Id. at 1074.
99. ADOLF A. BERLE, JR & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 336 (1939) (emphasis added).
100. The classic case standing for this proposition is, of course, Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).
101. By way of example, in Alcott v. Hyman, the Delaware Supreme Court said that when corporate directors bore the burden to show entire fairness, they were required to show that they acted with "utmost good faith" and that the transaction was "scrupulous[ly] fair." 208 A.2d 501, 506 (Del. 1965);
102. see also Weinberger v. UOP, Inc., 457 A.2d 701,710 (Del. 1983) (holding the same).
103. See, e.g., In re The Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006) (explaining that a plaintiff may rebut the presumption of the business judgment rule by providing evidence of a breach of fiduciary duty);
104. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (same).
105. See, e.g., Bennett v. Propp, 187 A.2d 405, 411 (Del. 1962) (holding director and chief executive officer liable for damages to the corporation resulting from stock repurchases motivated by a desire to perpetuate control).
106. Among the definitions of loyal in Webster's are "faithful in allegiance to one's lawful ... government," "faithful to a private person to whom fidelity is due," and "faithful to a cause, ideal, or custom." WEBSTER'S NINTH NEW COLLEGIATE DICTIONARY 708 (9th ed. 1988) [hereinafter WEBSTER'S]. Webster's also directs readers to "faithful" as a synonym for loyal.
107. Id.
108. Loyalty is defined primarily as "the quality or state of being loyal," and the reader is directed to "fidelity" as a synonym. Id.
109. The Oxford English Dictionary and The American Heritage Dictionary of the English Language are similar in substance on all these points. 9 THE OXFORD ENGLISH DICTIONARY 74-75 (2d ed. 1989) [hereinafter 9 OED];
110. THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE 1038 (4th ed. 2000) [hereinafter AMERICAN HERITAGE]. The etymological origins of loyal and loyalty can be traced to the Old French leial, which originally was from the Latin legalis, or legal, and lex, or law, and then became loyal.
111. ERIC PARTRIDGE, ORIGINS: A SHORT ETYMOLOGICAL DICTIONARY OF MODERN ENGLISH 344-45, 367 (4th ed. 1966). Given the root of loyal and loyalty, it is unsurprising that an obsolete usage of those terms was "legal" and "lawfulness, legality."
112. 9 OED, supra, at 74-75;
113. WEBSTER'S, supra, at 708.
114. Webster's defines fidelity as "the quality or state of being faithful" and identifies allegiance and loyalty as key synonyms. WEBSTER'S, supra note 35, at 460;
115. see also 5 THE OXFORD ENGLISH DICTIONARY 876 (2d ed. 1989) [hereinafter 5 OED] (defining fidelity as "[t]he quality of being faithful; faithfulness, loyalty, unswerving allegiance to a person, party, bond, etc."). More particularly, Webster's says that fidelity "implies strict and continuing faithfulness to an obligation, trust, or duty" and that loyalty "implies a faithfulness that is steadfast in the face of any temptation to renounce, desert, or betray."
116. WEBSTER'S, supra note 35, at 460. The American Heritage Dictionary of the English Language defines fidelity as "faithfulness to obligations, duties, or observances."
117. AMERICAN HERITAGE, supra note 35, at 655.
118. It traces the origin of the word to the Latin, fidelis, or faithful, which came from the Latin fides, or faith. Id.
119. It indicates that "fidelity" and loyalty are nouns denoting faithfulness and that fidelity "implies the unfailing fulfillment of one's duties and obligations and strict adherences to vows or promises," with loyalty implying "steadfast and devoted attachment that is not easily turned aside." Id. at 656.
120. Webster's defines faithful as "steadfast in ... allegiance," "firm in adherence to promises or in observance of duty," and "firm in adherence to whatever one owes allegiance" and notes that loyal "implies a firm resistance to any temptation to desert or betray." WEBSTER'S, supra note 35, at 446;
121. see also 5 OED, supra note 36, at 679 (defining faithful as "[f]irm in fidelity or allegiance ... constant, loyal, true" and "abiding by a covenant or promise, steadfast"). The American Heritage Dictionary of the English Language uses a similar definition and states that "[f]aithful and loyal both suggest undeviating attachment" and that the adjectives "faithful" and "loyal" mean "adhering firmly and devotedly to someone or something that elicits or demands one's fidelity."
122. AMERICAN HERITAGE, supra note 35, at 636.
123. A search of the Lexis Nexis corporate case law database as of June 26; 2008 revealed ninety-two uses of this term.
124. WEBSTER'S, supra note 35, at 446.
125. Id Again, The American Heritage Dictionary of the English Language defines faithless in a substantively similar manner.
126. See AMERICAN HERITAGE, supra note 35, at 636.
127. This nineteenth century description of a director's duty well illustrates this point and the use of various forms of the word faith to define the obligation of loyalty: Those who assume the position of directors ... , assume also the obligations which the law imposes on such a relation. The stockholders confide to their integrity, to their faithfulness, and to their watchfulness, the protection of their interests...The principals are not present to watch over their own interests; they cannot speak in their own behalf; they must trust to the fidelity of their agents. If they discharge these important duties and trusts faithfully, the law interposes its shield for their protection and defense; if they depart from their line of duty, and waste, or take themselves, instead of protecting, the property and interests confided to them, the law, on the application of those thus wronged or despoiled, promptly steps in to apply the corrective, and restores to the injured what has been lost by the unfaithfulness of the agent.
128. Cumberland Coal & Iron Co. v. Sherman, 30 Barb. 553, 570 (N.Y. Gen. Term 1859) (emphasis added).
129. AMERICAN HERITAGE, supra note 35, at 636;
130. WEBSTER'S, supra note 35, at 446.
131. AMERICAN HERITAGE, supra note 35, at 656;
132. see also WEBSTER'S, supra note 35, at 460 (defining a fiduciary as one having a relation "of, relating to, or involving a confidence or trust");
133. Joseph T. Walsh, The Fiduciary Foundation of Corporate Law, 27 J. CORP. L. 333, 333 (2002) ("The fiduciary concept, as we know, had its origin in the law of trusts, where its literal meaning-faithfulness-correctly described the duty or responsibility owed by one who held title, but not ownership, to property of another, who lacked legal title but could, in equity, claim the benefits of ownership.").
134. WEBSTER'S, supra note 35, at 446.
135. AMERICAN HERITAGE, supra note 35, at 636.
136. 5 OED, supra note 36, at 679.
137. The Oxford English Dictionary defines good faith as "fidelity, loyalty" and directs the reader to the following definition of faith:
138. WEBSTER'S, supra note 35, at 527.
139. AMERICAN HERITAGE, supra note 35, at 757.
140. Id at 756;
141. see also WEBSTER'S, supra note 35, at 527 (also noting that one of the definitions of good as an adjective is loyal).
142. Berle, supra note 26, at 1054.
143. In this regard, it is traditional for the words "good faith" to be followed by the words "and in the best interest of whatever or whoever is the object of the fiduciary's duty. For example, in corporate law, the basic articulation of the business judgment rule states that it is 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 interest of the company." Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (emphasis added). In a host of other related contexts this "good faith and" formulation is used.
144. See, e.g., Chauffeurs, Teamsters and Helpers, Local No. 391 v. Terry, 494 U.S. 558, 567 (1990) (opinion of Marshall, J.) ("Just as a trustee must act in the best interests of the beneficiaries, a union, as the exclusive representative of the workers, must exercise its power to act on behalf of the employees in good faith."
145. (citing 2A W. FRATCHER, SCOTT ON LAW OF TRUSTS §170 (4th ed. 1987);
146. Vaca v. Sipes, 386 U.S. 171, 177 (1967)));
147. First Nat'l Bank of Ottawa v. Converse, 200 U.S. 425, 443 (1906) (Brewer, J., dissenting) ("It did so, and, so far as the record shows, everything was done in good faith and in the belief that the best interests of the bank would be promoted thereby." (emphasis added));
148. Price v. Forrest, 173 U.S. 410, 428 (1899) (opinion of Harlan, J.) ("As he had acted in good faith, and in the elief that he was promoting the best interests of the Government...." (emphasis added));
149. Clark v. Bever, 139 U.S. 96, 104 (1891) (opinion of Harlan, J.) ("[Although the settlement upon that basis may have been demanded by the best interests of the company, and was made in good faith, without intention to harm the corporation or to defraud its creditors, existing or subsequent....");
150. In re Feldman, 400 F.3d 292, 293 (5th Cir. 2005) ("The district court, however, affirmed the conclusions of the bankruptcy court that 'the settlement of doubtful and disputed claims' for $25,000 was 'entered into in good faith' and 'was in the best interest of the Estate.'");
151. Juvelis ex rel Juvelis v. Snider, 68 F.3d 648, 655 (3d Cir. 1995) ('"Under New York law, a guardian may change the domicile of an incompetent... if done in good faith and in the best interest of the conservatee.'"
152. (quoting Love v. Roosevelt Hosp., No. 92 Civ. 4211 (JSM), 1993 WL 190345, at *1 (S.D.N.Y. June 2, 1993)) (emphasis added));
153. Cornwell v. City of Riverside, 896 F.2d 398, 399 (9th Cir. 1990) ("Under a California statute enacted in 1985 a public entity other than the state is authorized to pay punitive damages awarded against its employees if the public entity finds that the employees were acting within the course of their employment, in good faith and 'in the apparent best interests of the public entity, ' and the payment would be 'in the best interests of the public entity.'" (emphasis added));
154. Eng v. Coughlin, 858 F.2d 889, 898 (2d Cir. 1988) ("We think that for inmates disabled by confinement in SHU, or transferred to another facility, the right to substantive assistance is an obligation imposed by the Due Process Clause of the Fourteenth Amendment. Further, the assistance must be provided in good faith and in the best interests of the inmate." (citation omitted) (emphasis added)).
155. See, e.g., Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005) (explaining that the implied covenant of good faith and fair dealing "requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain" (citation and internal quotation marks omitted));
156. RESTATEMENT (SECOND) OF CONTRACTS §205 cmt. a (1981) ("Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving 'bad faith' because they violate community standards of decency, fairness or reasonableness.").
157. The academic debate over the definition of the implied contractual obligation of good faith demonstrates its focus on faithfulness to the parties' contractual bargain. Compare Steven J. Burton, Breach of Contract and the Common Law Duty To Perform in Good Faith, 94 HARV. L. REV. 369, 373 (1980) (stating that good faith performance of a contract requires that a party exercising discretion in performing a contract must do so consistent with the reasonable expectations of the contracting parties and not to recapture opportunities forgone upon contracting),
158. with Robert S. Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 VA. L. REV. 195, 262-63 (1968) (explaining that "good faith" in contract law functions to exclude the many different forms of bad faith, which in most cases involves "frustratfing] the justified expectations of another").
159. ABA COMM'N ON CORPORATE LAWS, CORPORATE DIRECTOR'S GUIDEBOOK 11 (4th ed. 2004).
160. Id. (indicating that the reference to the "best interests of the corporation ... emphasiz[es] the director's primary allegiance to the corporate entity").
161. Id.
162. see also BARRY REITER, DIRECTORS' DUTIES IN CANADA 54 (Kathleen Jones-Lepidas ed., 2006) (defining the duty of loyalty under Canadian corporate law as the "director's duty to act honestly and in good faith with a view to the best interests of the corporation").
163. Eisenberg, supra note 2, at 16.
164. Milton Friedman, The Social Responsibility of Business Is To Increase Its Profits, N. Y. TIMES, Sept. 13, 1970, §6 (Magazine), at 124
165. quoting his book Capitalism and Freedom for the proposition that "there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game").
166. ROBERT CHARLES CLARK, CORPORATE LAW §1.2, at 18 (1986) (stating that a corporation's purpose is to "maximize the value of the company's shares, subject to the constraint that the corporation must meet all its legal obligations to others who are related to or affected by it");
167. Einer Elhauge, Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. REV. 733, 756-57 (2005) ("[M]ost advocates of a duty to profit-maximize concede it should have an exception for illegal conduct.").
168. See Gregory A. Mark, Comment, The Personification of the Business Corporation in American Law, 54 U. Cm. L. REV. 1441, 1452 (1987) ("That a corporation derived its powers from the sovereign was inherent in the contractual conception of the grant theory. The government granted nothing unless it agreed to the objects of the proposed corporation. The benefits that the corporation was expected to produce were exchanged for the powers necessary to produce them.");
169. see also MODEL BUS. CORP. ACT ANN. §3.01 (2002) (historical background).
170. Indeed, a well-researched article argues that American corporate law has not only never authorized directors to violate the law in search of profits, it has gone in the other direction by leaving directors with a great deal of discretion to manage the corporation in a manner that leads to fewer profits, if that less aggressive managerial approach advances the public interest as rationally understood by the directors.
171. Elhauge, supra note 60, at 738, 745.
172. DEL. CODE ANN. tit. 8, §101(b) (2001).
173. Id §102(a)(3) (2001 & Supp. 2008).
174. Id. § 284(a) (2001).
175. See, e.g., Craven v. Fifth Ward Republican Club, Inc., 146 A.2d 400̀, 402 (Del. Ch. 1958) (granting a preliminary injunction against illegal liquor sales, and holding that "[c]ontinued serious criminal violations by corporate agents in the course of the discharge of their duties could very well constitute the misuse of a charter");
176. Southland v. Decimo Club, Inc., 142 A. 786, 792 (Del. Ch. 1928) (revoking the charter of a corporation chartered for non-profit purposes, stating "[w]here... a non-profit corporation shows by its conduct that profit-making is one of its most important purposes, if not its chief one, I can see no escape from the conclusion that it has misused and abused its franchise").
177. Purely in linguistic terms, the word "loyalty" might actually be thought a far more natural term than "good faith" to refer to the basic obligation of a director to manage the corporation in a way that is faithful to its fundamental mission as articulated in the corporate law giving it birth. In dictionaries considering the related meanings of loyalty, faith, and fidelity, loyalty is associated more commonly with being true to the law or the nation.
178. AMERICAN HERITAGE, supra note 35, at 1038;
179. 9 OED, supra note 35, at 74-75;
180. WEBSTER'S, supra note 35, at 708. That is perhaps because the English word loyal has its roots in the Old French(leial and loial) and Latin (legalis) words for legal, which derive from the Latin word for law, lex.
181. See AMERICAN HERITAGE, supra note 35, at 1038.
182. See RESTATEMENT (SECOND) OF AGENCY §440 (1958) ("Unless otherwise agreed, the principal is not subject to a duty to indemnify an agent:... (c) if the agent's loss resulted from an enterprise which he knew to be illegal.");
183. see also DEL. CODE ANN. tit. 8, §145(a) (2001) (corporation has no power to indemnify a director, officer, or agent in a criminal action or proceeding unless that person "had no reasonable cause to believe [her] conduct was unlawful");
184. id. §102(b)(7) (charter may not insulate a director from liability to the corporation or its stockholders for breach of fiduciary duty involving knowing violations of law). We note that section 145 could be read to extend to the corporation the power to indemnify a director for loss associated with activity that, while profit-generating, was consciously undertaken in violation of civil (as opposed to criminal) law. Such a reading is possible because section 145 states that the corporation has the power to indemnify a director for losses related to civil and criminal proceedings "if the [director] acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation" and only adds the requirement that the director "had no reasonable cause to believe [her] conduct was unlawful" for criminal proceedings.
185. Id §145(a).
186. But see S. Samuel Arsht & Walter K. Stapleton, Delaware's New General Corporation Law: Substantive Changes, 23 Bus. LAW. 75, 78 (1967) ("It was also apparent that revision [to section 145] was appropriate with respect to the limitations which must necessarily be placed on the power to indemnify in order to prevent the statute from undermining the substantive provisions of the criminal law and corporation law." (emphasis added)).
187. The problem for those who wish to use a free-standing duty of good faith as a firewall against lawbreaking, e.g., Eisenberg, supra note 2, at 31-38, is that the very statute that suggests indemnification is available for civil lawbreaking equates good faith with profit-seeking and not requiring law compliance. Section 145(a) thus muddles the issue of law compliance. But that muddle is not clarified by a third core fiduciary duty. Clarity comes when the loyalty inquiry is focused in the right way; in requiring a director to be loyal to the societally authorized corporation, an entity is duty-bound to try to conform itself to lawful behavior and law businesses. In any event, we believe that it would be mistaken for anyone to read section 145(a) as suggesting a tolerance for intentional lawbreaking of any kind by directors or officers of Delaware corporations. Authoritative commentary on section 145(a) suggests that it had a very narrow purpose to address the possible unfairness that might arise if corporate officials acting in good faith to benefit the corporation unwittingly committed acts that were illegal. Arsht & Stapleton, supra, at 78 ("If indemnification in criminal proceedings were to be included within the scope of the statute, the full deterrent effect of the anti-trust law, for example, could be maintained only if indemnity were limited to situations where the party involved had no reasonable cause to believe his conduct was unlawful.").
188. The recognition that the directors must be loyal to the corporation's legally authorized purposes is not a new one. In 1989, for example, Chancellor Allen described the duty of loyalty as requiring directors to endeavor to "manage the corporation within the law, with due care and in a way intended to maximize the long run interests of shareholders." TW Servs., Inc. v. SWT Acquisition Corp., C.A. Nos. 10427, 10298, 1989 WL 20290, at *7 (Del. Ch. Mar. 2, 1989). The potential liability directors face if they cause the corporation to violate the positive law is also not new.
189. See, e.g.. GRANGE, supra note 15, at 411 ("There are, however, some classes of cases where mere good faith [toward the stockholders] and honest intention are not sufficient. If the directors use the corporate funds in a transaction which is outside the corporate powers (ultra vires) or which is forbidden by statute, they are exceeding their authority, and if loss results, they must make it good...." (emphasis added)).
190. We are not contending that what the core fiduciary duties of loyalty and care require will not evolve with change in the economic and business circumstances that corporations face; they clearly will so evolve, and should. See ROSCOE POUND, INTERPRETATIONS OF LEGAL HISTORY 1 (1923) ("Law must be stable and yet it cannot stand still."). Rather, we doubt that an essential, new core duty could have emerged, or will emerge, this deep into the law's use of equitable review to evaluate the conduct of corporate fiduciaries.
191. MODEL Bus. CORP. ACT §8.30(a) (2009).
192. The good faith language has remained the same since the statutory definition of a director's duties was added to the Model Business Corporation Act in 1974: A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.
193. Report of Committee on Corporate Laws: Changes in the Model Business Corporation Act, 30 Bus. LAW. 501, 502 (1975).
194. The origins of the familiar "in good faith" and "in a manner he reasonably believes to be in the best interests of the corporation" can be traced, in large measure, to the same language in the 1967 version of the DGCL indemnification provision because the Model Act copied that provision, and the Model Act's definition of a director's duties was written to parallel its indemnification provision.
195. See id. at 504 ("The standard provided in Section 35, as revised, sets forth the duty of care applicable to directors (including a director's right to rely on others), reflects the good faith concept embodied in the so-called 'business judgment rule,' which has been viewed by the courts as a fundamental precept for many decades, and to the extent possible parallels the Act's indemnification provisions.");
196. Orvel Sebring, Recent Legislative Changes in the Law of Indemnification of Directors, Officers and Others, 23 Bus. LAW. 95, 96 (1967)
197. (explaining that the Model Act's indemnification provision is virtually identical to the 1967 DGCL provision). The Model Act's formulation of a director's duty is similar to some earlier state statutory articulation of directors' duties. See, e.g., GRANGE, supra note 15, at 406 ("Officers and directors ... shall discharge the duties of their respective positions in good faith, and with that diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions."
198. (quoting 1933 Wash. Sess. Laws 796)).
199. MODEL BUS. CORP. ACT §8.30 cmt. para. 3 (2009);
200. see also id. §8.30(b) (stating that "members of the board of directors ... shall discharge their duties with the care that a person in a like position would reasonably believe appropriate under similar circumstances").
201. Id. §8.31 cmt. 1.A, para. 1 (quoting Gagliardi v. TriFoods Int'l, Inc., 683 A.2d 1049, 1051 n.2 (Del. Ch. 1996)) (alteration in original) (emphasis added).
202. The Model Act's commentary on good faith is consistent with the usage of good faith in other Committee on Corporate Laws publications.
203. See, e.g., Committee on Corporate Laws, Other Constituencies Statutes: Potential for Confusion, 45 Bus. LAW. 2253, 2269 (1990)
204. ("Even under existing law, particularly, where directors must act quickly, it is often difficult for directors acting in good faith to divine what is in the best interests of shareholders and the corporation. If directors are required to consider other interests as well, the decision-making process will become a balancing act or search for compromise. When directors must not only decide what their duty of loyalty mandates, but also to whom their duty of loyalty runs (and in what proportions), poorer decisions can be expected."). That commentary is echoed across our northern border as well: section 122(1) of the Canada Business Corporations Act provides, "Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interest of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." Canada Business Corporations Act, R.S.C, ch. C-44, §122(1) (1985). Here again, the concept of good faith is one of subjective motivation and is explicitly distinct from the concept of required care. The United Kingdom's Companies Act 2006 also equates good faith to subjective motivation in its definition of a director's "duty to promote the success of the company."
205. See Companies Act, 2006, c. 46, §172(1) (U.K.) (providing that "[a] director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole");
206. GEOFFREY MORSE, PALMER'S COMPANY §8.2608 (rev. ed. 2007) (explaining that section 172 is a "subjective test");
207. see also Companies Act, 2006, c. 46, §174(1) (U.K.) (providing separately that a "director of a company must exercise reasonable care, skill and diligence"). Another noteworthy feature of the United Kingdom's Companies Act 2006 is that it separates the duty to promote the success of the company, which turns on subjective motivation, from the duty to avoid conflicts of interest, which is absolute regardless of subjective motivation. Compare id. §172 with id. §§175-77.
208. Sylvester v. Beck, 178 A.2d 755, 757 (Pa. 1962).
209. 1 THE AMERICAN AND ENGLISH ENCYCLOPAEDIA OF LAW 1071
210. (David S. Garland & Lucius P. McGehee eds., 2d ed., Northport Long Island, N.Y, Edward Thompson Co. 1896) (explaining that "[t]he paramount and vital principle of all agencies is good faith, for without it the relation of principal and agent could not well exist"). This treatise also lists the duty of "Reasonable Skill and Diligence" as among an agent's duties. Id. at 1063;
211. see also id at 1058, 1086 (listing the other duties as "Fidelity to Instructions" and "Keeping and Rendering Accounts").
212. ERNEST W. HUFFCUT, THE LAW OF AGENCY §90 (2d ed. 1901).
213. FRANQS B. TIFFANY, HANDBOOK OF THE LAW OF PRINCIPAL AND AGENT §146 (Richard R.B. Powell ed., 2d ed. 1924). The section on the agent's duty of care, skill, and diligence is section 145.
214. Id.
215. We acknowledge that not all authorities so clearly link the duty of loyalty with the concept of good faith. One authority, under the general heading describing the agent's duty "Not to be Negligent," notes that "the agent is, in all cases, bound to act in good faith, and to exercise reasonable diligence, and such care and skill as are ordinarily possessed by persons of common capacity engaged in the same business."
216. FLOYD R. MECHEM, A TREATISE ON THE LAW OF AGENCY §1279 (2d ed. 1914). We do not quarrel with this generalization, but we question why there is a reference in this precise context to a duty to act in good faith, and the author does not offer any explanation for this. It appears to be an importation of more generalized statements about an agent's overall duties.
217. Edward Rock & Michael Wachter, Dangerous Liaisons: Corporate Law, Trust Law, and Interdoctrinal Legal Transplants, 96 Nw. U. L. REV. 651, 653-57 (2002)
218. (summarizing fiduciary duties under trust law and their "transplanting" into corporate law, as reflected particularly in Litwin v. Allen, 25 N.Y.S.2d 667 (N.Y. Sup. Ct. 1940)).
219. Wormley v. Wormley, 21 U.S. (8 Wheat.) 421 (1823).
220. Id. at 438.
221. Id. at 441.
222. Id.
223. See generally Harold Marsh, Jr., Are Directors Trustees? Conflict of Interest and Corporate Morality, 22 Bus. LAW. 35 (1966) (discussing the movement away from the absolute prohibition on transactions between a corporation and its directors).
224. Although we see no need to further belabor the point, a similar pattern emerges if one looks at the early jurisprudence involving other specific applications of the fiduciary relationship. In the context of receiverships, for example, "the receiver, as an officer of the Court, is responsible as such for good faith and reasonable diligence. When the property is lost or injured by any negligence or dishonest execution of the trust, he is liable for damages."
225. JAMES P. HOLCOMBE, AN INTRODUCTION TO EQUITY JURISPRUDENCE ON THE BASIS OF STORY'S COMMENTARIES 144 (Cincinnati, Derby, Bradley & Co. 1846).
226. Likewise, in the context of partnerships, the primary duties of a partner include "The Utmost Good Faith" and 'To Devote Themselves to the Business." FRANCIS M. BURDICK, THE LAW OF PARTNERSHIP 308-313 (Boston, Little, Brown & Co. 1899);
227. see also id. at 314 (listing the third primary duty of a partner as contribution).
228. 3 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE §1676 (14th ed. 1918).
229. 4 JOHN NORTON POMEROY, A TREATISE ON EQUITY JURISPRUDENCE §§1066, 1075 (5th ed. 1941);
230. see also id. §1062 (explaining the third duty of a trustee: 'To Carry the Trust into Execution").
231. Id. §1075.
232. In an interesting article, Professor Ethan Stone suggests that the duty of loyalty is a component of a larger duty of good faith. Stone, supra note 4, at 899. He points out that there are many contexts in which it is said that directors must act in good faith and that the specialized rules dealing with self-dealing transactions constitute a narrower subset of cases. See id. If, as a matter of linguistics, corporate law had come to embrace as fundamental the two core duties of good faith and care, we would not differ from Professor Stone. In that scenario, there would still have been a requirement for the law to grapple with self-dealing transactions in a more specific way. But in that case, we would have seen as unnecessary any need to create a third, independent duty of loyalty, distinct from the generalized obligation of good faith toward the corporation and its stockholders. That is, our central point would remain the same, which is that it is impossible to sever the relationship between loyalty and good faith. If the law adopted good faith as the overall rubric, we have little doubt that the definition of a good faith fiduciary is one who acts loyally to advance the best interests of the corporation.
233. See, e.g., Gladstone v. Bennett, 153 A.2d 577, 582 (Del. 1959)
234. ("Those who undertake to form a new corporation, to procure for it the capital through which it may carry out the purpose or purposes . for which it was formed, are necessarily charged with the duty to act in good faith in dealing with it."
235. (citing Hays v. The Georgian, Inc., 181 N.E. 765, 768 (Mass. 1932)));
236. see also, e.g., Dickerman v. N. Trust Co., 176 U.S. 181, 204 (1900) ("[The promoter] is treated as standing in a confidential relation to the proposed company, and is bound to the exercise of the utmost good faith. The promoter is the agent of the corporation and subject to the disabilities of an ordinary agent. His acts are scrutinized carefully, and he is precluded from taking a secret advantage of the other stockholders." (citation omitted)).
237. Gladstone, 153 A.2d at 582 (explaining that promoters "will not be permitted to benefit by any secret profit which they may receive at the expense of the corporation or of its members").
238. One comparatively recent treatise on corporate law succinctly captured the history of a director's duties as follows: "The underlying principles have not changed during the years. Directors are held to two fundamental tests: (a) honesty and good faith; [and] (b) dihgence."
239. GEORGE D. HORNSTEIN, CORPORATION LAW AND PRACTICE §431 (1959) (citation omitted).
240. 1 VICTOR MORA WETZ, A TREATISE ON THE LAW OF PRIVATE CORPORATIONS §516 (2d ed., Boston, Little, Brown & Co. 1886).
241. 2 SEYMOUR D. THOMPSON, COMMENTARIES ON THE LAW OF PRIVATE CORPORATIONS §1215, at 164 (2d ed. 1909).
242. Here is another venerable example of the use of good faith in reference to the director's basic duty to put the corporation's financial interest ahead of her own. CLARK & MARSHALL, supra note 24, at 1010 ("Directors or other officers of a corporation are liable to it for any loss which it may sustain by reason of their refusal or failure to enter into a contract for its benefit, if they do not act in good faith; and if it is their duty in a particular case to enter into a contract, or to purchase or take a transfer of property, on behalf of the corporation, and, in violation of this duty, they enter into the contract or acquire the property personally, they will not be permitted to retain the benefit, but will be held as trustees for the corporation." (citation omitted)).
243. 114 A. 224 (Del. Ch. 1921).
244. Id. at 227-228
245. Id. at 228.
246. Id. (quoting Du Pont v. Du Pont, 242 F. 98,136 (D. Del. 1917)). Non-Delaware corporate cases from the same era also equate good faith with loyalty.
247. See, e.g., Pepper v. Litton, 308 U.S. 295, 306 (1939)
248. ("[Fiduciaries'] dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or [controlling] stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein." (citing Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599 (1921))).
249. 132 A. 442,449 (Del. Ch. 1926).
250. 5 A.2d 503, 510 (Del. 1939).
251. Id.
252. 199 A.2d 548 (Del. 1964).
253. Id. at 554.
254. Id.
255. Id. at 556. To the same effect is Kors v. Carey, 158 A.2d 136, 142 (Del. Ch. 1960)
256. (involving what would today be described as "greenmail," noting a "presumption that directors form their judgment in good faith," and "find[ing] no evidence that a selfish desire to retain jobs on the part of the non-managerial... directors was a factor in their decision" to approve a repurchase of stock from the potential bidder).
257. 493 A.2d 946,954 (Del. 1985).
258. Id. at 955.
259. Id.
260. Id. at 954.
261. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173,181 (Del. 1986).
262. Id. at 177.
263. Id. at 177-178
264. Id. at 182.
265. Id.
266. Unocal and Revlon are consistent with other Delaware Supreme Court jurisprudence in the 1980s clearly using the concept of good faith to give definition to the duty of loyalty.
267. See, e.g., Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) ("In discharging [the] function [of managing the corporation], the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders.");
268. id. (stating that when entire fairness standard applies because of self-interest, directors must show good faith motives and fair results);
269. id. at 1284 n.32 (referring to the "fundamental duties of loyalty and care");
270. id. at 1284-85, 1288 (explaining that when directors are subject to the Revlon requirement to pursue the highest value, the duties of loyalty and care are both implicated, and directors must act in an informed manner for the purpose of obtaining the best deal for the stockholders);
271. id. at 1288 (citing RJR Nabisco with approval for the proposition that, so long as directors have "fulfilled their fundamental duties of care and loyalty" in pursuing the highest value transaction, they have satisfied Revlon);
272. Polk v. Good, 507 A.2d 531, 536 (Del. 1986)
273. ("In performing their duties the directors owe fundamental fiduciary duties of loyalty and care to the corporation and its shareholders."); id. at 536-37 (implying that the following were instances of loyalty breaches: "fraud," "unfairness," and defensive actions motivated by entrenchment rather than a "good faith" effort to address a threat to the corporation);
274. Smith v. Van Gorkom, 488 A.2d 858, 872-873 (Del. 1985)
275. (stating that "a director's duty to exercise an informed business judgment is in the nature of a duty of care, as distinguished from a duty of loyalty" and that when "there were no allegations of fraud, bad faith, or self-dealing ... it is presumed that the directors reached their business judgment in good faith,... considerations of motive are irrelevant," and therefore only issues of care, rather than loyalty, were at issue); id. at 872 ("Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But the fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud.").
276. S. Samuel Arsht, The Business Judgment Rule, 8 HOFSTRA L. REV. 93, 127 (1979).
277. Id. at 128.
278. Id. at 129.
279. Id.
280. Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
281. Cf. Sean J. Griffith, Good Faith Business Judgment: A Theory of Rhetoric in Corporate Law Jurisprudence, 55 DUKE L.J. 1, 34 (2005)
282. ("In seeking to answer the basic corporate law question, courts applying the good faith standard do not confine themselves to the analytics of either traditional fiduciary duty. Instead, good faith is used as a loose rhetorical device that courts can wield to find liability or enjoin actions that do not quite fit within established doctrinal categories.").
283. See generally Eisenberg, supra note 2; Sale, supra note 2.
284. Civ. A. No.10389,1989 WL 7036, at *1 (Del. Ch. Jan. 31,1989).
285. Id. at *2.
286. Id. at *13 (citations omitted).
287. Id at* 14.
288. Eg., Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983);
289. Ryan v. Tad's Enters., Inc., 709 A.2d 682,689-690 (Del. Ch. 1996).
290. In re RJR Nabisco, 1989 WL 7036, at *13.
291. Or, it focused on a question of scienter, in legal jargon.
292. Id. at* 15.
293. Id.
294. Id.
295. Id. at *14-15.
296. Id. at * 18.
297. On this point, the RJR decision is probably the most controversial. To many, Revlon is important in two respects: making clear that directors have the duty to seek the highest value reasonably attainable when the corporation is going to be sold and subjecting director conduct in that context to a heightened reasonableness review, at least for the purposes of granting injunctive relief.
298. See, e.g., 1 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS AND BUSINESS ORGANIZATIONS §4.20[B] (3d ed. Supp. 2009) (capturing both elements by entitling the subsection on Revlon "The Duty To Auction the Company-Revlon Enhanced Scrutiny").
299. RJR, 1989 WL 7036, at * 20.
300. Id. at *4.
301. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (noting that the business judgment rule presumes "directors 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").
302. City Capital Assoc. Ltd. P'ship v. Interco Inc., 551 A.2d 787, 802 (Del. Ch. 1988).
303. Id.
304. C.A. Nos. 10427, 10298, 1989 WL 20290 (Del. Ch. Mar. 2, 1989). In TW Services, Chancellor Allen covered much of the same ground as in RJR Nabisco, when faced with the question of Revlon's relevance when a board refuses to negotiate with a bidder making a tender offer that was supported by a majority of the stockholders but was conditional on the target board's assent to a merger agreement. In confronting that issue, Chancellor Allen posed the question thusly: "Does a director's duty of loyalty to the 'corporation and its shareholders' require a board ... to enter a Revlon mode?" Id. at *8. He said that the answer to that question was no if the board had made a "good faith" judgment that remaining independent would "maximize the long run interests of shareholders." Id. at *7-12. As in Interco, Chancellor Allen referred to an examination of whether the directors had fulfilled their duties of loyalty and care as critical to the application of the business judgment rule, and as turning on whether the board reached its "decision in good faith pursuit of legitimate interests, and did ... so advisedly." Id. at *10.
305. 564 A.2d 651 (Del. Ch. 1988). In Blasius, Chancellor Allen ruminated on the question of whether directors could breach their duty of loyalty if they, while acting in the good faith belief that
306. they were benefiting the stockholders, acted for the primary purpose of preventing a majority of the stockholders from expanding the board and electing a new majority. As his first layer of loyalty analysis, Chancellor Allen examined whether the directors were motivated by a good faith concern for the economic welfare of the stockholders rather than their own self interest and concluded that they likely were.
307. Id. at 658. He then went on to articulate why he believed that the board had, nonetheless, committed what he characterized as an "unintended violation of the duty of loyalty."
308. Id. at 663. Indeed, Chancellor Allen's use of another synonym for loyalty - fidelity - makes clear that his examination of the board's good faith inquiry was in aid of his consideration of whether there was a loyalty breach. Id. at 658 (describing the directors' argument that if they acted in "good faith" to protect the stockholders, their actions could not have "constituted any violation of the duty of fidelity that a director owes"). But even though he believed the directors were acting in good faith, Chancellor Allen found an unintentional breach of the duty of loyalty because the directors' actions prevent the electorate from unseating them.
309. Id. at 663. In our view, one might consider Blasius as involving a specialized form of the entire fairness doctrine, whereby even if directors are acting in subjective good faith, they cannot act to prevent their own unseating without demonstrating a very powerful justification for their self-serving conduct.
310. See, e.g., Equity-Linked Investors, L.P. v. Adams, 705 A.2d 1040, 1054-55 (Del. Ch. 1997) ("This existing uncertainty respecting the meaning of 'Revlon duties' was substantially dissipated by the Delaware Supreme Court's opinion in Paramount. The case teaches a great deal, but it may be said to support these generalizations at least: (1) where a transaction constituted a 'change in corporate control,' such that the shareholders would thereafter lose a further opportunity to participate in a change of control premium, (2) the board's duty of loyalty requires it to try in good faith to get the best price reasonably available (which specifically means that the board must at least discuss an interest expressed by any financially capable buyer), and (3) in such context courts will employ an (objective) 'reasonableness' standard of review (both to the process and the result!) to evaluate whether the directors have complied with their fundamental duties of care and good faith (loyalty).");
311. SICPA Holdings, S.A. v. Optical Coating Lab., C.A. No. 15129, 1997 WL 10263, at *4 (Del. Ch. Jan. 6, 1997) ("The core element of the fiduciary duty of loyalty impressed upon corporate directors is a good faith attempt to exercise power over corporate property or process so as to advance legitimate interests of the corporation and not for any selfish reason.");
312. Dolby v. Key Box "5" Operatives, Inc., C.A. No. 12771, 1994 WL 507881, at *5 (Del. Ch. Sept. 8,1994) (explaining that the "[e]quitable obligations" that "are imposed in recognition" of stockholders entrusting directors with legal power over the assets of the corporation "are most centrally obligations of loyalty: the duty to try in good faith to achieve the broad original goal and not to divert the property for the benefit of the fiduciary");
313. Mendel v. Carroll, 651 A.2d 297, 304 (Del. Ch. 1994) (stating that action to dilute a controlling stockholder might be permissible if the board "acts in good faith and on the reasonable belief that a controlling shareholder is abusing its power");
314. In re Amsted Indus. Inc. Litig., C.A. No. 8244, 1988 WL 92736, at *8 (Del. Ch. Aug. 24, 1988) ("I evaluate the prospects of ultimate vindication of a breach of loyalty theory (i.e., a failure to pursue in good faith the shareholders' interests to the exclusion of other interests) as substantially greater than a breach of due care theory.");
315. In re Fort Howard Corp. S'holders Litig., 1988 WL 83147, at *14 (Del. Ch. Aug. 8, 1988) ("I understand [Revlon] as essentially a breach of loyalty case in which the board was not seen as acting in the good faith pursuit of the shareholders' interests.");
316. Citron v. Fairchild Camera and Instrument Corp., C.A. No. 6085, 1988 WL 53322, at *17 (Del. Ch. May 19, 1988) ("The requirement that a director act in good faith in pursuit of the best interest of the corporation and its shareholders is at the core of the fiduciary duty of a director. To act in good faith, however, will not alone satisfy that duty. A director must, as well, act advisedly, with due care.");
317. In re J.P. Stevens & Co. S'holders Litig., 542 A.2d 770, 781 (Del. Ch. 1988) (explaining Revlon "as a breach of loyalty case (i.e., one in which the board appeared not to be acting in good faith for the shareholders' benefit)").
318. CA. No.8358, 1991 WL 111134 (Del. Ch. June 24, 1991).
319. Id. at *7.
320. See id. at *4.
321. Cede & Co. v. Technicolor, Inc., ("Cede T') 542 A.2d 1182, 1191 (Del. 1988).
322. Cede & Co. v. Technicolor, Inc., C.A. No.7129, 1990 WL 161084, at *2 (Del. Ch. Oct. 19, 1990). The appraisal decision was reversed and the appraisal part of the case has its own tortured history. Some nine years later, another Chancellor, William B. Chandler III, concluded that Chancellor Allen had essentially been correct, finding that the fair value of Technicolor was $21.98 per share.
323. Cede & Co. v. Technicolor, Inc., C.A. No. 7129, 2003 WL 23700218, at *1 (Del. Ch. Dec. 31, 2003). By that time, the main financial issue in the case was the interest rate to be applied.
324. See id at *45-48. On appeal, the Supreme Court upheld Chancellor Chandler's valuation methodology but made changes to the discount rate and corporate debt that resulted in the Supreme Court award determining that fair value was $28.41 per share.
325. Cede & Co. v. Technicolor, Inc., 884 A.2d 26,41 (Del. 2005). Overshadowing the change in the estimate, however, was the Supreme Court's reversal of the Chancellor's determination that postjudgment interest should be calculated from the date of the original appraisal judgment.
326. Id. at 42-43. That decision resulted in the extension of the prejudgment interest rate calculated from 1983 to 1990 into 2005, thus giving the petitioners twenty-two years of interest at a highly favorable rate.
327. Id.
328. Cinerama, 1991 WL 111134, at *10.
329. Id. at *10-15.
330. Id.
331. Id. at *8.
332. Id. at *14.
333. Id. at *15.
334. Id. at * 15-16. Because of this, Chancellor Allen did not address how he would have applied the entire fairness standard to determine the personal liability of directors who were disinterested and acted with good faith and due care. His jurisprudence would suggest that he would not have found that such directors - having personally satisfied their duties of loyalty and care - would have shared responsibility for any judgment against the interested directors because the transaction was unfair.
335. In his introduction to the decision, Chancellor Allen made clear that Cinerama bore the burden to show injury precisely because the merger was untainted by "self-dealing or other breach of loyalty."
336. Id. at *3 (emphasis added);
337. see also id. at *15 (emphasizing the core nature of loyalty and care by stating that the "law cannot sensibly demand that directors abandon personal financial concerns in order to serve on a corporate board; it is enough that directors meet their duty of loyalty and care to the corporation").
338. Chancellor Allen refrained from making any final conclusion about their subjective good faith because he found no reason to believe that their self-interest affected the independent board majority's actions in any manner adverse to the stockholders.
339. Id. at *2, *14 - 15.
340. 190. Id. at* 15.
341. Id. at *16. Note here how the word "genuine" acts as a proxy for the concept of good faith.
342. Id.
343. Id. at *17
344. (citing and quoting Barnes v. Andrews, 298 F. 614, 616-618 (S.D.N.Y. 1924)).
345. Id.
346. Id. at *16, *18-19.
347. Cede & Co. v. Technicolor, 634 A.2d 345, 361 (Del. 1993). This famous sentence in Technicolor self-highlighted the word "triads," suggesting three triplets of duties. Although typos are common in time-pressured judicial work, this typo suggests that the Technicolor panel did not view itself as establishing a new legal landmark; otherwise, one would think the panel would have focused on this key word and whether it was being used properly.
348. Id at 360.
349. Id. at 361 (citations and quotations omitted) (emphasis added).
350. Id.
351. Cinerama, 1991 WL 111134, at *8.
352. The Delaware Supreme Court's transformation of the three-part inquiry of RJR into an articulation of separate duties represented a departure from its earlier decision in Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989). In that decision, the Delaware Supreme Court framed the application of the business judgment rule consistently with the analysis in RJR. The initial inquiry was whether the transaction was affected by self-dealing or self-interest, thereby triggering rebuttal of the presumption and imposition of the entire fairness'standard.
353. Id If that shift did not occur in the first instance, the plaintiffs could still succeed by proving that the decisions of the defendants were not undertaken in subjective good faith or resulted from a breach of the duty of care. Id That is, even if the business judgment rule standard of review, rather than the entire fairness standard, applied in the first instance, the plaintiffs could still win if they proved a breach of the duty of loyalty (an improper motivation) or a breach of the duty of care (a failure to "act on an informed basis").
354. See id
355. Cinerama, 1991 WL 1.11134, at *9.
356. Id. at *15.
357. Cede & Co. v. Technicolor, 634 A.2d 345, 358 (Del. 1993).
358. See id at 365 (indicating that the parties and trial court had not brought section 144 into "their reasoning or analysis" and that Cinerama did not rely on the charter provision the Supreme Court felt was helpful to its position).
359. See id. at 372-373
360. See id. at 364.
361. See id. at 365. Ultimately, it did stand.
362. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168-1169(Del. 1995).
363. Technicolor, 634 A.2d at 361
364. (quoting iconic language set forth in Guth v. Loft, 5 A.2d 503, 510 (Del. 1939)).
365. Id.
366. Id. at 362.
367. Indeed, the Court went on to articulate that the mere possession by a director of a conflicting self-interest did not have the effect of rebutting the business judgment rule presumption and that "there must be evidence of disloyalty." Id. at 363. "Examples of such misconduct include, but are certainly not limited to, the motives of entrenchment, fraud upon the corporation or the board, abdication of directorial duty, or the sale of one's vote."
368. Id (citations omitted).
369. Id. at 359.
370. See id. at 362.
371. Id. at 369-70 ("We adopt, as clearly supported by the record, the Chancellor's presumed findings of the directors' failure to reach an informed decision in approving the sale of the company.");
372. cf. id. at 351 n.3 ("We borrow liberally from, and generally adopt, the Chancellor's findings.").
373. Id. at 370.
374. Id. at 370-71. In the course of so ruling, the Supreme Court stated that a showing of a breach of the duty of loyalty simply has the effect of requiring the directors to show that the transaction was fair.
375. Id. at 371. That statement strikes us as odd if it includes within its rubric a transaction that s subject to entire fairness review because the approving majority was not sufficiently independent. In that instance, the use of entire fairness review does not mean a loyalty breach has occurred. If the directors show entire fairness in that context, they will have shown that they did not commit a loyalty breach. When a loyalty breach is established by proof that the board acted for an improper motive, it makes more sense to say that the defendants might mitigate the remedial consequences of the breach by showing that the outcome was nonetheless fair, although that does not undo the breach or necessarily immunize the breaching fiduciary from all consequences.
376. See Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996) (holding that "some recovery is warranted" for a breach of the duty of loyalty resulting from a controlling stockholder's attempted expropriation of a corporate opportunity even though the corporation would not have been able to take advantage of the opportunity itself because of the controlling stockholder's right to veto the potential transaction).
377. But even in this instance, Technicolor echoed RJR. See In re RJR Nabisco, Inc. v. S'holders Litig., C.A. No.10389, 1989 WL 7036, at *15 (Del. Ch. 1989) (asking rhetorically, "is it not apparent that... a director [who acted for a reason unrelated to a pursuit of the corporation's best interests] would be required to demonstrate that the corporation had not been injured and to remedy any injury that appears to have been occasioned by such transaction?").
378. Technicolor, 634 A.2d at 358 (stating that Chancellor Allen had subordinated the duty of care to avoid the adverse effects that he perceived would flow from Van Gorkom)
379. ; id. at 370 (finding that Chancellor Allen had ignored controlling effects of Van Gorkom without explanation in favor of Barnes v. Andrews).
380. Id. at 367.
381. Id.
382. Id. at 368 n.36
383. (quoting Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989)) (emphasis added).
384. See, e.g., In re Emerging Commc'ns, Inc. S'holders Litig., C.A. No.16415, 2004 WL 1305745, at *38 (Del. Ch. May 3, 2004) ("Having concluded that the Privatization was not entirely fair, the Court must next determine the nature of the fiduciary duty violation - whether of care, loyalty, or good faith - that resulted in the unfair transaction.");
385. In re Siliconix Inc. S'holders Litig., C.A. No. 18700, 2001 WL 716787, at *9 (Del. Ch. June 19, 2001) ("When the directors of the tender target company communicate with the shareholders ... they must, while complying with their ever-present duties of due care, good faith and loyalty, communicate honestly.");
386. Jackson Nat'l Life Ins. Co. v. Kennedy, 741 A.2d 377, 386 (Del. Ch. 1999) (stating that the "fiduciary obligation" owed by directors "has been characterized by the Supreme Court as a 'triad': due care, good faith and loyalty.");
387. Havens v. Attar, C.A. No. 15134, 1997 WL 55957, at *11 (Del. Ch. Jan. 30, 1997) ('To rebut this presumption, plaintiffs must demonstrate that the directors breached one of their fiduciary duties: good faith, loyalty, or due care." (citing Technicolor, 634 A.3d at 361)).
388. 698 A.2d 959, 970 (Del. Ch. 1996).
389. E.g., H. Lowell Brown, The Corporate Director's Compliance Oversight Responsibility in the Post Caremark Era, 26 DEL. J. CORP. L. 1 (2001);
390. Hillary A. Sale, Monitoring Caremark's Good Faith, 32 DEL. J. CORP. L. 719, 721-730 (2007). In this connection, Chancellor Allen was likely familiar with Professor Eisenberg's scholarship on the monitoring model of the board of directors.
391. See Melvin Aron Eisenberg, THE STRUCTURE OF THE CORPORATION 164-70 (1976) (describing the role of the board of directors as monitoring management rather than managing the corporation's business);
392. see also Melvin A. Eisenberg, The Board of Directors and Internal Control, 19 CARDOZO L. REV. 237, 240 (1997) (explaining that "the monitoring board must be responsible for the existence, integrity, and efficacy of the corporation's internal control").
393. In re Caremark, 698 A.2d at 960-961
394. Id. at 967.
395. Id.
396. Id.
397. See id. at 967-68.
398. Id. at 968.
399. Id. at 969. Caremark conclusion that a board's decisions about the extent to and means by which monitoring of this kind would occur were not properly the subject of a traditional business judgment review has been contested by distinguished commentators, who believe that a board's judgments about the corporation's monitoring systems are business judgments, entitled to deference under the traditional form of review. See, e.g., Bainbridge et al., supra note 8, at 602 ("[T]he thrust of Allen's opinion suggests that the business judgment rule ought to protect directors who rationally elect against adopting a compliance program after weighing the costs against the benefits.").
400. See Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007) (explaining that Caremark "plainly held that director liability for failure to monitor required a finding that the directors acted with the state of mind traditionally used to define the mindset of a disloyal director - bad faith - because their indolence was so persistent that it could not be ascribed to anything other than a knowing decision not to even try to make sure the corporation's officers had developed and were implementing a prudent approach to ensuring law compliance")
401. (citing In re Caremark, 698 A.2d at 968-70).
402. Cf. Can. Commercial Workers Indus. Pension Plan v. Alden, C.A. No. 1184-N, 2006 WL 456786, at *6 (Del. Ch. Feb. 22, 2006) ("The duty of oversight implicates both the duty of care and the duty of loyalty.");
403. see also Scott, supra note 13, at 932 (noting that the traditional dichotomy between loyalty and care is "not always sharp. For example, management that puts forth an inadequate and halfhearted effort could be seen as failing to take proper care in the conduct of the business or as breaching the duty of loyalty in shirking on the job and consuming more leisure.");
404. supra text accompanying notes 17-18 (noting that most of what directors do implicates the duty of care and loyalty).
405. In re Caremark, 698 A.2d at 971.
406. Id.
407. Id. (first emphasis added).
408. Id. at 968
409. (quoting Barnes v. Andrews, 298 F. 614, 618 (S.D.N.Y. 1924)).
410. Cede & Co. v. Technicolor, 634 A.2d 345, 370 & n.38 (Del. 1993).
411. See, e.g., Andrew Countryman, Disney Case Has Full Attention of Directors; Investor Groups Are Watching Too, CHI. TRB., Jan. 30, 2005, §5, at 1;
412. Rita K. Farrell, Disney Shareholders Ask Court To Reverse Ovitz Pay Decision, N.Y. TIMES, Jan. 26, 2006, at C6;
413. Laura M. Holston, For $600 a Week, Screen-Side Seats to Lawsuit Involving Disney, N.Y. TIMES, Oct. 11, 2004, at ClO;
414. Nicholas D. Kristof, Op-Ed., Announcing an Award for Greed, N.Y. TIMES, Aug. 14, 2005, at 13;
415. David Litterick, US Judge Backs Disney on Ovitz Sum, DAILY TELEGRAPH (London), Aug. 10, 2005, at 3;
416. Michael McCarthy, Ovitz Shows Confidence, Poise in His Testimony, USA TODAY, Nov. 1, 2004, at 28;
417. Bruce Orwall & Chad Bray, Outcome of Ovitz Suit To Affect Liabilities of Corporate Boards, WALL ST. J., Dec. 15, 2004, at B3.
418. 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).
419. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 63 (Del. 2006)
420. (quoting Appellants' Opening Brief at 23).
421. Id.
422. Id. at 63-64. Somewhat more colorfully, Chancellor Chandler had described the good faith concept as "[s]hrouded in the fog of... hazy jurisprudence." In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 754 (Del. Ch. 2005).
423. In re Disney, 906 A.2d at 67 n.112.
424. Id. at 63.
425. Id. at 64-65.
426. Id. at 64.
427. Id at 66-67 n.111
428. (citing Nagy v. Bistricer, 770 A.2d 43,48 n.2 (Del. Ch. 2000) (referring to "a director who consciously disregards his duties to the corporation and its stockholders");
429. In re Caremark Int'l Derivative Litig., 698 A.2d, 959, 971 (Del. Ch. 1996);
430. Gimbel v. Signal Cos., Inc., 316 A.2d 599, 604 (Del. Ch. 1974) (referring to directors acting "for any personal advantage or out of improper motive or intentional disregard of shareholder interests");
431. Allaun v. Consol. Oil Co., 147 A. 257, 261 (Del. Ch. 1929) (referring to "reckless indifference to or a deliberate disregard of the interests of the whole body of stockholders")).
432. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369 n.29 (Del. 2006).
433. Id. at 370.
434. Id. at 373, 369.
435. Id. at 369-70
436. (quoting Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003)).
437. Id.
438. Id.
439. Id.
440. See, e.g., Jill E. Fisch & Kenneth M. Rosen, Is There a Role for Lawyers in Preventing Future Enrons?, 48 Vm.. L. REV. 1097, 1134 (2003) ("Although higher standards of conduct for outside directors may reduce director willingness to serve, in light of the importance of board monitoring, this may be a desirable result.");
441. Leo E. Strine, Jr., Derivative Impact? Some Early Reflections on the Corporation Law Implications of the Enron Debacle, 57 Bus. LAW. 1371, 1385-96 (2002) (suggesting that the Enron/WorldCom-era market debacle would create a renewed focus on directors' duty to make a good faith effort to monitor the corporation's compliance with its legal obligations and the soundness and prudence of the company's business strategy, especially given the prevalence of section 102(b)(7) clauses, and stating that after Enron, "one can see how plaintiffs' lawyers might approach 'duty to monitor' cases somewhat differently in the near future. They might well ask courts to infer not only that audit committee members did not know enough about their company's financial and accounting practices, but also that the committee members knew that their inadequate knowledge disabled them from discharging their responsibilities with fidelity. Stated crudely, the court will be called on to conclude that a director who is conscious that he is not devoting sufficient attention to his duties is not acting in good faith, and is therefore not entitled to exculpation from damages liability." (emphasis omitted));
442. Cheryl L. Wade, Corporate Governance Failures and the Managerial Duty of Care, 76 ST. JOHN'S L. REV. 767, 768 (2002) ("One of the conclusions I make in this Article is that a greater emphasis on standards of care for both directors and officers is warranted, especially in the aftermath of the corporate governance failures that scandalized Enron, WorldCom, and other large publicly held companies.").
443. Even after Stone v. Ritter's helpful clarification of the place of good faith in the law of director duties, economic pressures and concerns over governance's contribution to corporate failures continue to generate commentary on standards of liability for disinterested directors. E.g., MARTIN LIPTON ET AL., SOME THOUGHTS FOR BOARDS OF DIRECTORS IN 2009, at 1 (2008), http://www.wlrk.com/docs/ThoughtsforDirectors2009.pdf ("Although the standard for director liability established in Delaware by the Caremark case accords directors considerable deference in fulfilling their oversight duties, there is a distinct possibility that this level of deference could end up being modified in light of the current economic crisis.").
444. See In re Abbott Labs. Derivative S'holders Litig., 325 F.3d 795, 809 (7th Cir. 2003) (holding that a breach of the duty of good faith would be established where "the directors knew of the violations of law, took no steps in an effort to prevent or remedy the situation, and that failure to take any action for such an inordinate amount of time resulted in substantial corporate losses");
445. McCall v. Scott, 239 F.3d 808, 818-19 (6th Cir. 2001) (finding that a board's intentional or reckless disregard of "red flags" warning of fraudulent practices could result in directors not being protected from liability by a section 102(b)(7) exculpatory provision due to the exception for "acts or omissions not in good faith");
446. see also Sale, supra note 224, at 735-43 (providing a detailed discussion of these cases).
447. This approach to liability enjoyed brief success even after Stone v. Ritter.
448. See Ryan v. Lyondell Chem. Co., CA. No. 3176-VCN, 2008 WL 2923427, at *23 (Del. Ch. Jul. 29, 2008) (denying defendant directors' motion for summary judgment in a stockholder class action because the record did not clearly demonstrate the absence of issues of material, fact with respect to the board's good faith discharge of its fiduciary duties), rev'd, 970 A.2d 235 (Del. 2009). The Delaware Supreme Court, however, found fault with this determination, noting that (i) "there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties," and (ii) "[i]nstead of questioning whether disinterested, independent directors did everything that they (arguably) should have done to obtain the best sale price, the inquiry should have been whether those directors utterly failed to attempt to obtain the best sale price."
449. Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 - 44 (Del. 2009); see also In re Lear Corp. S'holder Litig., 967 A.2d 640, 654 (Del. Ch. 2008) ("Courts should... be extremely chary about labeling what they perceive as deficiencies in the deliberations of an independent board majority over a discrete transaction as not merely negligence or even gross negligence, but as involving bad faith.");
450. McPadden v. Sidhu, 964 A.2d 1262, 1263 (Del. Ch. 2008) (dismissing a stockholder suit despite a finding of gross negligence and observing that the "sometimes fine distinction between a breach of care (through gross negligence) and a breach of loyalty (through bad faith) is one illustrated by the actions of the board in this case").
451. We are keenly aware that the dividing line between concepts of gross negligence and of bad faith can blur precisely because, if properly employed, the concept of gross negligence requires conduct so grossly disparate from that expected, that the person engaging in such behavior almost invites suspicion about her state of mind. See, e.g., 57A AM. JUR. 2D Negligence §227 (2004) ('"Gross negligence' is commonly defined as very great or excessive negligence, or as the want of, or failure to exercise, even slight or scant care or 'slight dihgence.'... In some jurisdictions, the term 'gross negligence' also encompasses conduct that 'smacks of intentional wrongdoing.'" (footnotes omitted));
452. 27 SAMUEL WILLIISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 70:49 (4th ed. 2003) (defining "gross negligence" as "the want of even scant care or an extreme departure from the ordinary standard of conduct").
453. Indeed, some of the post-Van Gorkom decisions contributed to this blur by conflating the corporate law definition of gross negligence with that of recklessness, see, e.g., Tomczak v. Morton Thiokol, Inc., C.A. No. 7861, 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) ("[G]ross negligence means reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason." (internal quotations omitted));
454. Solash v. Telex Corp., 1988 WL 3587, at *9 (Del. Ch. Jan. 19, 1988) (to be grossly negligent, a "decision has to be so grossly off-the-mark as to amount to 'reckless indifference' or a 'gross abuse of discretion'" (internal citations omitted)), thus confusing two concepts that are often kept distinct in other contexts where mens rea is important.
455. See, e.g.. MODEL PENAL CODE §2.02 (1962) (separating recklessness from negligence in its definitions of the mental states required for culpability);
456. cf. W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS §34 (5th ed. 1984) (noting that several courts "have construed gross neghgence as requiring willful, wanton, or reckless misconduct... [b]ut [that] it is still true that most courts consider that 'gross negligence' falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind" (footnotes omitted)). Moreover, Van Gorkom's decision to embrace a gross negligence standard as the requirement for holding a director liable for the breach of a duty of care, and the legislative response in section 102(b)(7) to allow exculpation of duty of care claims established the arguably fine line between gross negligence and bad faith as the boundary between exculpated and nonexculpated behavior. To our mind, however, this reality does not dimmish the importance of good faith's role in implementing the duty of loyalty; it makes it even more important. To be faithful to exculpatory statutes like section 102(b)(7), courts must distinguish between director conduct that only involves gross neghgence and that which involves bad faith.
457. See, e.g., 18 U.S.C. §472 (2006) (including an intent-to-defraud requirement as part of the crime of counterfeiting obligations of the United States);
458. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 212-14 (1976) (holding that scienter is a requirement for a violation of Rule 10b-5, the general antifraud provision of the Securities Exchange Act);
459. see also JOHN S. BAKER, JR., REVISITING THE EXPLOSIVE GROWTH OF FEDERAL CRIMES 7 (2008), http://www.heritage.org/Research/Legalissues/upload/lm-26.pdf (detailing that seventy-four of the ninety-one federal criminal statutes passed between 2000 and 2007 contained a mens rea requirement). Indeed, those same corporate lawyers often draft agreements that turn on a party's state of mind.
460. See, e.g., Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 746 (Del. Ch. 2008) (interpreting and applying a term in a merger agreement that provided for uncapped damages in the case of a "knowing and intentional breach" of the agreement).
461. See, e.g.. MODEL PENAL CODE §210 (1962) (varying the type of criminal homicide based primarily on the offender's mental state);
462. 1 CHARLES E. TORCIA, WHARTON'S CRIMINAL LAW §27 (15th ed. 1993) ("In the ordinary case, an evil deed, without more, does not constitute a crime; a crime is committed only if the evil doer harbored an evil mind.");
463. see also 18 U.S.C. §2(b) (2006) ("Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal." (emphasis added));
464. MODEL PENAL CODE §2.02 (1962) (defining the mental states required for culpability).
465. See, e.g., N.Y. Soc. SERV. LAW § 384-b(7)(a) (McKinney 2003) (stating that parental rights may be terminated permanently if a parent has failed "substantially and continuously or repeatedly to maintain contact with or plan for the future of the child" during an extended period of time during which the child was in protective custody (emphasis added));
466. 23 PA. CONST. STAT. ANN. §2511(a)(2) (West 2001) (stating that parental rights may be permanently terminated where "[t]he repeated and continued incapacity, abuse, neglect or refusal of the parent has caused the child to be without essential parental care, control or subsistence necessary for his physical or mental well-being and the conditions and causes of the incapacity, abuse, neglect or refusal cannot or will not be remedied by the parent" (emphasis added));
467. 1 THOMAS JACOBS, CHILDREN & THE LAW: RIGHTS AND OBLIGATIONS § 3:5 (2008) ("Parental rights to custody and control of a child may be terminated in the case of a seriously neglected child. Generally, the court will require clear and convincing proof that the acts of neglect are 'willful' and that serious harm to the child has resulted from the neglect.").
468. See supra sections III.C and IIID. A contemporaneous discussion of the debate preceding the adoption of section 102(b)(7) suggests that the participants in that debate recognized the categorical distinction between the failure to exercise due care in a particular situation and a pattern of sustained inattention: The Delaware courts have made it quite clear that liability for failure to exercise due care in decisionmaking is predicated on concepts of gross negligence. Critics argue that such a doctrine exposes directors to personal liability on a tort theory, a jurisprudential concept which may not be appropriate in the boardroom setting, absent a pattern of sustained inattention.
469. E. Norman Veasey & Jesse A. Finkelstein, New Delaware Statute: Allows Limits on Director Liability and Modernizes Indemnification Protection, Bus. LAW. UPDATE, July/Aug. 1986, at 1,1 (emphasis added).
470. See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243-44 (Del. 2009);
471. In re Lear Corp. S'holder Litig., 967 A.2d 640, 654 (Del. Ch. 2008);
472. McPadden v. Sidhu, 964 A.2d 1262, 1263 (Del. Ch. 2008).
473. See Lund, supra note 2 (proposing a more robust application of liability for bad-faith conduct, tempered by a legislatively enacted option to adopt charter provisions excluding liability for actions or inactions taken in conscious disregard of director responsibilities).