Elizabeth,

I understand the distinction that you are making, but you write as if these terms have some metaphysically correct meaning. The boundaries of "good faith" and "bad faith" have always been contested, and all you are doing is creating a universe in which there are three categories of behavior ("good faith," "not in good faith," and "bad faith") rather than two categories of behavior ("good faith" and "bad faith"). What do you gain by doing this?

Under your description of "not in good faith," the gain comes from moving the liability line so that director behavior less egregious than "bad faith" leads to liability. And from your description (see the Sudney Poitier example), such behavior looks like negligence or the absence of due care. I cannot imagine that this was the intention of the Delaware legislature in drafting 102(b)(7), which was crafted precisely to allow firms to proscribe the imposition of liability for negligence.

Gordon,
Thank you for the comments. They are all super comments, and they certainly reveal the weaknesses of my position. I will try my hand at responding:

With respect to your second paragraph first, it is the abdication cases that I would get with the third category that I could not reach (in most cases) with the two categories. So, yes, something less egregious than "bad faith" would be within the reach of the phrase "not in good faith." But I have no problem with that. My view is that, because we are dealing with a fiduciary relationship, we should be mindful of the abdication of a duty. The fiduciary (director) takes an affirmative obligation to act in the best interests of the beneficiary - it is the "affirmative obligation" aspect that leads me to conclude a middle category ("not in good faith") is required. Two categories - good faith and bad faith - might work for your arms-length transaction. But life is different for people who have assumed a duty, such as a fiduciary duty, right?

That said, I understand your 102(b)(7) point, and I imagine you would say in response to my above fiduciary point "102(b)(7) is supposed to lighten the load of liability, fiduciary relationship or not."

I have two responses to that:
(1) As you know, 102(b)(7) was a response to the alleged "insurance crisis" following Van Gorkom. But the legislative history of the provision consists of four documents, as I recall (two of which are memos of one and two pages). When you track down the sources cited in the memos, you find newspaper articles dealing with a handful (less than a dozen, as I recall) of corporations (small and med. sized, I think) that are complaining about various insurance concerns (not limited to D&O insurance, as I recall). Based on that basically unpersuasive legislative history and the fairly sloppy/ambiguous language in 102(b)(7) itself, I am unsympathetic to the argument that "good faith" should be interpreted in 102(b)(7) in a different way than "good faith" is interpreted in the rest of the fiduciary world. Do we want to rely *that* strongly on word-of-mouth legislative history?

Let the legislature go back and re-draft if they want the words of 102(b)(7) to mean something other than what the words literally mean. I have no reason to believe that each individual legislator (back in 1987 or whenever Del. adopted their statute) really *knew* exactly what the language of the statute would reach or not reach. As the story is told to me, the legislature did not engage in robust discussion, and the legislature surely did not work through exactly what was going to be carved out by 102(b)(7) (in practical terms). Perhaps a few cases of a very literal interpretation of a 102(b)(7) provision would give the legislature reason to go back and fix their drafting errors (well, the drafting errors of a few members of the corporate bar). At the same time, they might realize, in hindsight, that there really *wasn't* a D&O insurance crisis (or firm research done to support that conclusion, anyway) to justify the ambiguous provision.

2. To that end. . . . The investor who pulls a charter that includes a 102(b)(7)-based provision is not going to know to read "good faith" to mean anything other than what "good faith" means, right? This cannot be our dirty little secret - that, based on what we know, "good faith" in the director-as-a-fiduciary context means something different than it would in the normal fiduciary context. That's not fair to folks who are not in the know (such as ye-olde-investor)! I get your point about the boundaries of "good faith," but the meaning of good faith in the world of fiduciaries seems (in my view) not to be hotly contested. "Good faith" in the fiduciary context means what I imagine ye olde investor would think it means - a director will act in good faith by doing his best to do right by the corporation. (He will not just be content to take the word of a couple of insiders that the Ovitz pay package is fine. He will actually put some effort into doing a bit of questioning himself. Trying to do right by the corporation. . . .) If there is a special meaning to "good faith," based on what we all know 102(b)(7) was intended to do, then let's TELL the investor.

As a final observation, it seems (based only on some research I did this summer, mind you) that "negligence" and "gross negligence" had historically been treated the same in the old director liability cases. The words were used interchangeably. So it might not be a bad idea for one of two things to happen:
(1) The legislature could sit down and hammer out the meanings they want to ascribe to certain words in the director liability area (such as gross negligence, good faith, "not in good faith," etc.), and then the legislature could draft out a four line statement to replace 102(b)(7) that deals with all of the loose ends and uncertainties. or
(2) The legislature could just adopt a back-door provision that allows corporations to limit a director's liability to only $100,000 or his last year's director's pay (such that the good faith, bad faith, gross negligence discussion would never have to happen). I have to believe that at least SOME of the Old Disney Directors (or the Enron directors or the WorldCom directors) would have happily given back their prior year's pay to settle the lawsuit, particularly since the conduct at issue was really on the fine-line between good faith and [insert appropriate language here].

Last thought:
Gordon, I know that my views, both above and in the initial post, are not necessarily the mainstream corp. academic views. And some might say that my ideas (letting "not-in-good-faith" mean what it says, treating director liability as the fiduciary duty problem that it is, interpreting 102(b)(7) to mean what it says) are just not realistic, given that the modern board is a monitoring board made up of high-profile, wealthy directors who will not serve if the world were as I want it to be.
But teaching Corporations has taught me that Delaware law in the fiduciary duty area is *ahem* a bit messy. It is just not very ... lock-step (in terms of the language used by different jurists, the steps in an analysis of a claim, the burden-shifting or not, etc.). So I have some faint hope that this area of law is still in enough flux (for example, is there a triad of duties or not?) that there might be a jurists or two or four who will consider using my "not in good faith" interpretation and my fiduciary duty-based definition of "good faith." Until we get a number of Delaware Supreme Court opinions to line up in some of these fuzzy areas, I will remain cautiously optimistic.

You keep saying things like "what the words literally mean" and "letting 'not-in-good-faith' mean what it says" as if "what it says" is transparently something other than "bad faith." You don't have to be a deconstructionist to believe that the meanings of "good faith" and "bad faith" are not obvious from the words themselves.

You also state, "I am unsympathetic to the argument that 'good faith' should be interpreted in 102(b)(7) in a different way than 'good faith' is interpreted in the rest of the fiduciary world." Although I am sure that you can point to cases or articles that make the distinction you make in other fiduciary contexts, my strong impression is that judges and commentators routinely view this world as binary, consisting of only "good faith" or "bad faith" and nothing in between. That is certainly true for the contractual duty of good faith, where Robert Summers' famously defined good faith as an "excluder," meaning that it exists in the absence of bad faith.

As for your normative point -- that directors should be subject to the same duties as other fiduciaries -- why? It is well established that fiduciary duties are highly responsive to context, and directors' duties are rightly tailored to their unique context. Just saying that they are fiduciaries does not tell you anything about the strictness with which the duty of good faith should be applied.

Finally, I am trying to imagine this investor who is reading a 102(b)(7) provision in a corporate charter and being duped. My imagination is not that expansive.

Gordon, again, all good comments! Thank you very much.

As to your comment about the meanings of good faith and bad faith, I disagree that they are not obvious from the words themselves. There are a smattering of cases on JUST that point - every now and again, some random person claims in court that the words are unconstitutionally vague. I have yet to find a case where that person wins. Usually the judge will say something recognizing that we all basically know what the phrase means. Further, if you were to line up 15 of your BA students and ask them (without reviewing any of the cases) what "good faith" means, in their view, in the director realm, I would bet $9 that they all come up with definitions pretty darn close to each other.

As to judges viewing the world of "good faith" as binary, you are correct that there are cases - actually *not* always in the fiduciary context - in which judges have observed that the lack of good faith is *not* the same as bad faith. I do not feel compelled to believe what the judges think - for what it is worth, I think Chancellor Chandler recognized somewhere in his opinion that he was using "bad faith" to define the absence of good faith b/c it was easier (I took that to mean "not because it was completely correct in the absolute sense"). And as to Summers, Patterson (I think that that is his name) has a book where he debunks Summers excluder analysis. I take that to give me a choice as to who I want to line up with. Also, Summers analysis works in the arms-length contracts world - I have not seen it regularly used in the fiduciary context. Rather, if you try to translate other "good faith" concepts from contracts/UCC to directors, you get a very rough overlay. (For example, the definition of "good faith" from the UCC world really does not line up well in the director realm at all.) I view it as much less than ideal to try to borrow a shoe that does not well fit. Instead, I would rather challenge folks in the director realm to come up with a more appropriate definition (which I think Chancellor Chandler did, by the way - he just did not USE his own definition).

And I just flat-out disagree with your second-to-last paragraph. Maybe you are familiar with work that I have missed, but it seems to me that using the label "fiduciary" brings with it the duty to act affirmatively in the best interests of the principal, regardless of what sort of fiduciary you are (trustee, agent, "special relationship" fiduciary). I mean, that's the point of being someone's fiduciary, right?

Your last comment is a tough one. I suppose I would say that when you rightly observe that there are likely few investors out there pulling charters to look for 102(b)(7)-based provisions, you are changing the rules of the game. Aren't we all supposed to believe that these things *are* important to the investor and will be reflected in the stock's market price? I get your point completely, but I would also suggest that your fairly accurate point would apply to. . . pharma disclosures (among many other things). Bristol-Meyers-Squibb is feeling all self-important b/c they are now disclosing their drug trial results on a hard-to-navigate website in language that is basically incomprehensible to the normal investor. Is the judge who is going to review BMS's settlement (which includes this disclosure obligation) likely to raise the point you raise above? Probably not, true though it might be. Does that mean that the disclosure by BMS should not be made? Not in my view.

(Thank you again for your great comments. I am glad that you disagree with me - that is better than agreeing with me, for purposes of helping me develop the argument. (Or abandon the argument. . . .))

This is probably getting to the point where the diminishing returns have diminished completely, but I will venture one more round.

The root problem here is that you clothe your normative argument in descriptive language. It might make sense in some circumstances to distinguish a category of actions called "not in good faith" from another category of actions called "bad faith," but that distinction does not follow ineluctably from the words themselves ... even if all 15 ignorant students agree. These concepts are judicially created (the legislature is a latecomer here), so your preference for the opinions of students who have not reviewed any of the cases over the opinions of the judges who decide those cases ("I do not feel compelled to believe what the judges think") or informed commentators is baffling to me.

As for the variability of duties across fiduciary relationships, I am happy to recommend my article, The Critical Resource Theory of Fiduciary Duty. Please note that this point is not one of the controversial claims in the article. For a more recent article, see John Langbein, Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?, 114 Yale L. J. 929 (2005), which argues that the duty of loyalty in trust law should be made less strict.

Finally, about investors. My point is not that investors don't know about Section 102(b)(7) provisions. I suspect that some do and some don't, but that is irrelevant to my main claim, which is that investors are not duped by the language of the statute. If you assume that investors know about these provisions, why do you assume that their understanding of the provisions is informed solely by the words of the statute (or charter in which they are embodied) and not from the meaning those words have been given by courts?

I am with Gordon. Business people need clear and predictable rules to plan their activities. The good faith vs bad faith dichotomy is (perhaps unavoidably) vague enough to generate harmful uncertainty. Introducing yet another vague category would cause a lot of harm with no offsetting benefits. I see no point in interpreting the statute in such a bizarre manner when a substantially more reasonable interpretation is readily available.

To clarify: by “bizarre” interpretation, I meant “unnecessarily business-unfriendly”, rather than “analytically incoherent.”

Kate and Gordon, thank you both for your thoughtful comments. This has been incredibly helpful in forcing me to see if my views hold water or pour like rusty sieves.

Just to be sure the horse is dead:
Gordon, my "root problem" is based on the dictionary. That is to say,
"not in good faith" and "bad faith" *are* by definition two different things. Both the dictionary and Patterson's book explain it far better than I can (Patterson's book, as I recall, is called "Good Faith and [something]"), but I do believe that it is not so far out for Nowicki (qua Scalia) to suggest that the dictionary might be a good source to help us . . . figure out what words mean. I realize that my position is much more black-and-white than yours, and I realize that I am reaching my position without affording deference to those who have gone before (jurors, commentators, etc.).

As to your comment about your students:
(1) I vaguely recall some contract-interpretation point that instructs us to give unambiguous words their normal meanings. (I understand that you think “good faith” is ambiguous. I do not. Nor do the judges in a bunch of cases – criminal cases, where the stakes are considerably higher, I might hasten to add - wherein the defendants tried to argue that "good faith" was ambiguous.) My point about consulting your 15 (hopefully not ignorant) students was intended to convey my thought that, actually, "good faith" really does have a commonly understood meaning, at least to the random guy pulled off the street (or poached out of your BA class). We should afford that commonly understood meaning to the phrase. Would all 15 of your students use the same words to articulate the meaning of “good faith”? No. But the ultimate meaning of each student’s definition would be close to the same, I imagine. That leads me to believe that “good faith” really does have some agreeable boundaries/parameters, such that “not in good faith” is a useable phrase.

(2) Unless you have students dissimilar to mine, I would respectfully suggest that it is not so far out to wonder whether the students might be in a good position to define "good faith" when lined up against some judges or academics who are now long committed to perhaps more narrow positions of how the phrase should be interpreted. My students often say brilliant things that I never would have contemplated. They have fresh eyes and open minds – I cannot claim to have the same on some issues to which I am too close.
Moreover, with all due respect, I am hoping that you are not implying that my view on what to do with "good faith" is worth any less consideration than that of a bunch of very learned judges or other equally informed commentators who have long held their views on good faith. You say that the fact that I am not willing to accept the opining of those folks baffles you. Maybe I am being overly bold, but, just to give you some insight into my thought process, I am remembering three things:
(a) There are judges and commentators on my side of the argument just as well as on yours, so it is not as though I am suggesting something uniquely absurd,
(b) the Langbein article that you cite involves exactly what you are gently suggesting I am surprising you by doing - Langbein maintains in that article that it makes sense to modify the "most fundamental" (and long-lived) rule of trust law, and
(c) I recall that it was the measly state court judge Stanley Fuld who had the chutzpah to say in a dissent, in 1949, exactly what the Supreme Court would say five years later in Brown. Fuld seems to have been unaware of his place in the hierarchy when he essentially disagreed with the Supreme Court (in terms of their position in Plessy), but he ultimately did o.k. for himself!

As to your last paragraph, my thought is this: If an investor reads the language of a 102(b)(7) provision in a charter, I cannot imagine he is then going to race off and spend hours on Westlaw looking at what judges and academics have said about the not-SAT-level words in the statute. Why would he – he likely has, as do your students, a general sense of what “good faith” means. And that is my point. Given the fiduciary role of the director, given the dictionary definition of "good faith," and given the ordinary usage of the phrase "good faith," it seems that we should either read the phrase in the BJR or 102(b)(7) for what it means (from a dictionary/"plain meaning" standpoint) or the Delaware legislature should clean things up.

(Again, I understand that you do not think "good faith" (and, therefore, “not in good faith”) has a clear meaning in the fiduciary context that can easily be applied to our directors qua fiduciaries (such that the absence of such ("not in good faith") can be easily recognized). You and I disagree on that point.)

In the event that any students are reading this, my reference to "ignorant students" should not be read as a dig against students. I was merely describing the students that Elizabeth had posited: students who had not read any of the cases on good faith.

There is a lot I could write in response to this latest comment, but most of it would be vaguely repetitious of what I have written in my other comments. I will vacate the field for other combatants.

The UCC defines "good faith" as "honesty in fact and the observance of reasonable commercial standards of fair dealing." 1-201. Helpful? Hmmmm. One might ask what is meant by "fair dealing"? "Although fair dealing is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. Failure to exercise ordinary care in conducting a transaction is an entirely different concept than failure to deal fairly in conducting the transaction. Both fair dealing and ordinary care ... are to be judged in the light of reasonable commercial standards, but those standards in each case are directed to different aspects of commercial conduct." 3-103, Official Comment 4. Query whether business/corporate cases might find it helpful to look to UCC cases for guidance on the meaning of good faith, fair dealing, etc.

For posterity, I will add two final thoughts and then I will retire.

Actually, first I will give a friendly wave to Tim Zinnecker. I am of the hyperbolic opinion that the very affable Tim Zinnecker knows everyone. I am sure that we could play Six Degrees (of Tim Zinnecker) and get all the way to the new Pope. . . .

Tim: David Frisch and I had discussed the UCC meaning, and it did not seem helpful b/c it was hard to carry over the parlance. But we did not discuss the specific comment that you quote above. Hmmmmm. I will revisit the UCC. Thanks for the tip.

My two final points:
(1) An act that is made in the absence of good faith is different from a negligent act. The “negligence” aspect of Gordon’s interpretation of the purpose of 102(b)(7) is not impacted by my interpretation of “not in good faith.” I should have said that sooner. Mea culpa.
(2) Kate (nice to meet you), your comment that my interpretation of good faith is "bizarre" could well be made by *ME* about your interpretation, no? Your meaning of "good faith" and "not in good faith" (based on what you are implying above would be your meaning) does not reflect the "plain meaning" a person would pull from the dictionary ("faithfulness" or "acting for the best interest of" or "adhering to duty").
On its face, good faith *has* a "common usage" or a "plain meaning" in the fiduciary (agent/trustee/director) context. Chancellor Chandler gave us a good “common usage” meaning when he observed that “[t]o act in good faith, a director must act at all times with an honesty of purpose and in the best interests and welfare of the corporation.” The Chancellor seems not to have cogitated, and he certainly did not cite!

Although the meaning of "good faith" varies by context, *within* our context - the director qua fiduciary qua agent/trustee context - good faith appears to have Chancellor Chandler’s common usage or plain meaning, such that we can define “not in good faith” with ease. An act “not in good faith” is an act that does not accord with our common meaning of good faith. This does not require hard core linguistics work, right? And based on my limited recollection of having worked for Farnsworth (requiescat in pace), I believe that I have no justification for looking further if I have a statutory phrase with a “plain meaning” and no “latent ambiguity.” I cannot justify going beyond the “not in good faith” language of 102(b)(7) to instead import “bad faith,” as I see it.