Ben,

Great post. The analogy to Frankfurt's framework would require that Frankfurt have some fourth level - something like "really bad mistakes regarding the truth." If you truly wanted to mirror the DE regime, you'd then have to separate substantively bad mistakes (bad judgment about the truth value of a statement?) from procedurally bad mistakes (speaking too quickly and without full investigation?).

Regardless of the latter distinction, the hard part for DE courts and for our hypothetical Frankfurt (I assume it's hypothetical, not having read the book), as you point out, is the inability to read minds. Because we have a hard time with that, we have to rely on inferences from observed behavior and inferring conscious gross negligence from plain ol' gross negligence is bound to be messy.

You mention that the Caremark/Stone requirement of "at least some monitoring system" is an example of an appropriate standard for separating good faith and due care. But, of course, that's a very low bar, one which is easily hurdled (in theory) even in cases of conscious disregard. More importantly, compliance monitoring is likely to represent only a subset of cases where we have to make the call as between gross negligence and conscious gross negligence. What about all of the other cases?

The Supreme Court held oral arguments in Ryan v. Lyondell yesterday, so we may know something soon. For reasons I discuss in an upcoming paper, I think the best answer is probably to live with the inherent fuzziness but permit exculpation for conscious disregard claims. There are issues with this approach (midstream charter amendments are famously problematic), but I think it's the best option we have assuming that we're committed to distinguishing gross negligence from conscious gross negligence.

Last question - how, if at all, does Frankfurt deal with sanctions for bs vs. sanctions for deceit? Does he differentiate? Sorry for my ignorance, I remember reading the book review but can't recall the specifics.

Thanks. I’m not very familiar with the scholarship in this area, but your proposal also sounds quite interesting. What would be the benefit of a new category of good faith with exculpation available? My initial reaction is that this would make the distinction between the duty of good faith and the duty of care academic. Are you assuming that a significant number of corporations will choose not to exculpate directors for violations of the duty of good faith, even though they have done so for the duty of care? Or is there a benefit to having an independent duty of good faith, regardless? The more fundamental question, not specific to your proposal, is whether there is reason to believe that existing legal and market control mechanisms are insufficient, especially given the response to Van Gorkom.

To address your main question, one way to extend the Frankfurt-inspired good faith category beyond the Caremark/Stone situation I mentioned is to ask whether the conscious disregard of duty alleged was repeated over time. Failure to establish a system of oversight is one example of pervasive neglect, but there might be others. I’d be inclined to say that allegations of gross negligence in connection with a single transaction, even if egregious, would fall within the duty of care. Otherwise, the distinction collapses or becomes too fuzzy to be useful.

Although far from perfect, evidence of systematic failure gives courts a guideline for distinguishing boards that have disengaged from the task of maximizing shareholder value from boards that have, on a particular occasion, done a bad job. An important caveat to all of this is that, as you put it, we are talking about “inferences from observed behavior.” It is certainly possible that a board might decide, rightly or wrongly, that a particular kind of oversight isn’t worth the cost and fail to establish monitoring precisely in order to maximize shareholder value.

Regarding sanctions, Frankfurt observes, without defending the intuition, that most people think lying is more culpable than b.s. As an example, he cites a passage from a novel where a father advises his son to avoid lying whenever he can just b.s. his way through.

Ben,

You're right that allowing exculpation may make the gross negligence/conscious gross negligence distinction an academic one. Given past experience with 102(b)(7), I would guess that the vast majority of firms would exculpate for "conscious disregard." And while there are reasons (managerial control over the amendment process or the power of learning externalities, for example) to think that such homogeneity would be a suboptimal result, I think, on balance, a firm's rejection of the conscious disregard standard would have some normative force. Plus, you never know, we may wind up seeing real diversity.

Drawing the line, as you propose, at repeated bad behavior is an interesting suggestion. It seems to be the view of Vice Chancellor Strine in his In re Lear opinion. While it does seem to provide a brighter line than, say, the relative egregiousness of a board's process, would you agree that we'd be paying a price in terms of the "single transaction" case with a truly horrific process? It may be that the price is low, but maybe not (I'm thinking of the sale-of-the-company context).

Andrew,

Viewed after the fact, I agree with you that there could easily be a “single transaction” case where a board has proceeded in conscious disregard of a known duty and where we would feel that this “horrific process” should not be treated leniently as a breach of the duty of care. I’m hesitant, though, because I would imagine that directors, ex ante, would not find it very reassuring to know that their exposure to liability turns on whether a fact finder later concludes they abandoned the mission of increasing shareholder value and that what counts as sufficient evidence of that abandonment cannot be specified in advance.

I think a version of good faith modeled on my b.s. theory would need very clear guidelines to have a chance of serving its intended purpose – again, assuming we want an independent duty of good faith at all. Maybe that does not follow, under your proposal, if violations of the duty of good faith can also be exculpated, but then I’m not sure where the “normative force” would come from. When you have a draft of the article ready for circulation, I’d certainly be curious to see how you develop this argument.

Thanks again for the feedback.

Ben