The Delaware
Supreme Court in In re The Walt Disney
Company Derivative Litigation (June 8, 2006) (listen to the oral argument) addressed the question of a
separate duty of good faith. Writing for a unanimous en banc court, Justice
Jacobs confirmed that a separate duty does exist. He defined bad faith by
quoting Chancellor Chandler’s descriptions:
A
conscious and intentional disregard of responsibilities, adopting a “we don’t
care about the risks” attitude. An intentional dereliction of duty, a conscious
disregard for one’s responsibilities.
Justice Jacobs
was careful to note that this is one formulation, and not the only formulation
of a definition of bad faith. He gave three categories of actions that arguably
constitute bad faith. First is “fiduciary conduct motivated by an actual intent
to do harm.” That, says Justice Jacobs, is quintessential bad faith. It seems
to me that this setting is also, and perhaps better, seen as a violation of the
duty of loyalty. That is, the fiduciary surely does not believe that his or her
action is in the best interest of the corporation.
The second
scenario that arguably constitutes bad faith is “lack of due care—that is,
fiduciary action taken solely by reason of gross negligence and without any
malevolent intent.” This is, without more, NOT
bad faith. The reason is that under DGCL §§ 102(b)(7) and 144 the legislature
has distinguished between violations of the duty of care and violations of good
faith. Thus this second scenario cannot constitute bad faith because it
violates the duty of care.
The third
scenario, and the most interesting in terms of doctrinal development, is
conduct that “falls in between the first two categories of (1) conduct
motivated by subjective bad intent and (2) conduct resulting from gross
negligence. This third category is what the Chancellor’s definition of bad
faith—intentional dereliction of duty, a conscious disregard for one’s
responsibilities—is intended to capture.” This bad faith exists separately for
two reasons. First, Justice Jacobs quotes Chancellor Chandler for examples:
The
good faith required of a corporate fiduciary includes not simply the duties of
care and loyalty, in the narrow sense that I have discussed them above, but all
actions required by a true faithfulness and devotion to the interests of the
corporation and its shareholders. A failure to act in good faith may be shown,
for instance, where the fiduciary intentionally acts with a purpose other than
that of advancing the best interests of the corporation, where the fiduciary acts
with the intent to violate applicable positive law, or where the fiduciary
intentionally fails to act in the face of a known duty to act, demonstrating a
conscious disregard for his duties. There may be other examples of bad faith
yet to be proven or alleged, but these three are the most salient.
Quaere why the
first two examples are not simply duty of loyalty violations and the third
either a duty of loyalty or duty of care (or both) violation?
Second, DGCL §
102(b)(7) makes three categories of acts non-exculpatory: “acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law.” So clearly there must be a distinction between them.
Perhaps most
cryptically, Justice Jacobs ends the discussion by dropping a footnote that
says,
[W]e
do not reach or otherwise address the issue of whether the fiduciary duty to
act in good faith is a duty that, like the duties of care and loyalty, can
serve as an independent basis for imposing liability upon corporate officers
and directors. That issue is not before us on this appeal.
Quaere, if a
duty of good faith doesn’t serve as an independent basis for imposing
liability, it seems not to serve any practical purpose. It becomes, then, a
duty that is aspirational only and which does not entail consequences for its
violation.