August 09, 2005
Good faith
Posted by Account Deleted

In paragraph 4 of my Preview I stressed the importance of whether the defendants acted in bad faith in the sense of “knowing or deliberate indifference.”  As Gordon points out, this was, in fact, a key to the case. The court laid out its view of bad faith at the beginning of its analysis, pp. 120-24.  It made clear that bad faith amounted to acting intentionally with a purpose other than to further the corporation’s interest. 

Throughout its analysis of the defendants’ conduct the court emphasized the difference between an absence of due care and intentional disregard of duty.

I found most interesting the court’s analysis of the function of a good faith duty in filling in the gaps in the duty of loyalty.  Noting that Eisner had stocked the Disney board with supine sycophants, the court said (p. 135, n. 487):

It is precisely in this context—an imperial CEO or controlling shareholder with a supine or passive board—that the concept of good faith may prove highly meaningful. The fiduciary duties of care and loyalty, as traditionally defined, may not be aggressive enough to protect shareholder interests when the board is well advised, is not legally beholden to the management or a controlling shareholder and when the board does not suffer from other disabling conflicts of interest, such as a patently self-dealing transaction. Good faith may serve to fill this gap and ensure that the persons entrusted by shareholders to govern Delaware corporations do so with an honesty of purpose and with an understanding of whose interests they are there to protect. In a thoughtful article, Professor Lyman Johnson has written about the richer historical and literary understanding of loyalty and care, beyond their more narrow “non-betrayal” and “process” uses in contemporary jurisprudence. Professor Johnson’s description of a more expansive duty of loyalty to encompass affirmative attention and devotion may, in my opinion, fit comfortably within the concept of good faith (or vice versa) as a constituent element of the overarching concept of faithfulness. See Lyman P. Q. Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 DEL. J. CORP. LAW 27 (2003).

Nevertheless, one wonders how much of a gap-filler the good faith duty will prove to be. Again, intentional disregard is necessary for liability.  Thus, despite many lapses of good governance, Eisner is not liable because he didn’t “short-circuit” the board’s decision-making processes (136), act with improper motive (p. 139, n. 485), and had a subjective belief that his actions were in the corporation’s best interests (141). Russell, the compensation committee chair, probably should have done more investigation, but he did not act in bad faith (144).  Watson was not “ostrich-like” and did not act with intentional disregard of the corporation’s interests, just as Poitier and Lozano did not “bury their heads in the sand” (p. 158).

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