The Convergence of Good Faith and Oversight

Abstract:     
In Stone v. Ritter, 911 A.2d 362 (Del. 2006), two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation's employees for law compliance. As to the former, Stone puts to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that although good faith may be described colloquially as part of a 'triad' of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. 911 A.2d at 370. Nevertheless, this holding may not matter much, because the Stone court makes clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being split out as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance.

As to the duty of oversight, Stone confirmed former Chancellor William Allen's dicta in Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed that Caremark articulates the necessary conditions for assessing director oversight liability. Stone, 911 A.2d at 365.

This article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leaves both sides worse off. New and unnecessary doctrinal uncertainties have been created. This article identifies those uncertainties and suggests how they should be resolved.

Number of Pages in PDF File: 52

Keywords: corporation, corporate governance, board of directors, good faith, oversight, Caremark, Delaware corporate law

JEL Classification: K22

working papers series