August 10, 2005
Bad Faith
Posted by S_Griffith

When does a director act in bad faith? When the director acts “for some purpose other than a genuine attempt to advance corporate welfare” (120) or for some reason “unrelated to a pursuit of the corporation’s best interests” (121). We then get a handful of hypothetical situations in which directors might not act in good faith—i.e., directors making decisions on the basis of greed, hatred, lust, envy, revenge, shame, pride, and (maybe) persistent sloth. Some of these are plain violations of more basic loyalty principles—most obviously greed, but maybe also envy and sloth. The others could only come up in dime store novels. Try to imagine a director who makes corporate decision on the basis of lust or revenge… The legal professoriate, at least, might be able to imagine this, but outside of the context of a law school hypothetical, I doubt such situations will ever arise. How would a litigant go about establishing that a decision was or was not motivated by lust? By introducing love letters into evidence? “Dear Honey, To show you how much I love you I am going to do something at the board meeting today that really sticks it to the man. Don’t ever leave me. Love, Snuggles.”

Without evidence like that, who can say what is in the hearts of men? So litigants will try to establish a breach of fiduciary duty by pointing to what actually happened. That is: process and outcomes. But that is how you establish traditional breaches like care and waste. So, my prediction (which I also made in the paper the Chancellor cites in footnote 402) is that despite all of the talk about good faith, at the end of the day, it won’t mean much. Litigants will go on fighting about care and loyalty and resort to good faith only in those situations where the traditional arguments (because of a 102b7 provision, for example) are unavailable, but even then, the good faith arguments will have the same form as the traditional arguments about care and loyalty.

In other words, this opinion, in spite of sketching the contours of something called “good faith” is a conservative opinion. The Chancellor even refrains from calling the allegations a good faith complaint—instead he says the claim states “a non-exulpated breach of fiduciary duty claim” (122). Try saying that five times fast. This might not have been the case—if, for example, the Chancellor had set the standard for establishing a breach of good faith much lower than the standard for establishing a breach of the BJR-shielded duty of care—but the opinion doesn’t do that. It slides the scale back in the direction of board authority and away from judicial accountability. And while it is true, as Charles Elson said in the NY Times, that “[i]t means that you can't just make a decision with a devil-may-care attitude,” it probably has not, as he went on to say, “altered director behavior forever.”

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