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Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law


Leo E. Strine Jr.


Government of the State of Delaware - Supreme Court of Delaware; Harvard Law School; University of Pennsylvania Law School

Lawrence A. Hamermesh


Widener University School of Law

R. Franklin Balotti


Richards, Layton & Finger

Jeffrey M. Gorris


Morris, Nichols, Arsht & Tunnell, Attorneys At Law

February 26, 2009

Georgetown Law Journal, Vol. 93, p. 629, 2010
Widener Law School Legal Studies Research Paper No. 09-13
Harvard Law and Economics Discussion Paper No. 630

Abstract:     
The duties owed by independent directors of large corporations to monitor the corporation's affairs have never had more political salience. Given the Enron-era debacles, the recent meltdown in our nation's financial sector, the dependence of workers on equity investments to secure their retirements, the globalization of American corporate law principles, and the complexity of managing corporations with international operations, the legal standards used to evaluate whether directors have complied with their fiduciary duties will be a subject of growing international policy interest. This article addresses an important dimension of that issue by examining the role of good faith in corporate law, and its use as the definition of the state of mind with which a director must act to comply with the fiduciary duty of loyalty. In particular, this article employs an historical, etymological, and policy-oriented analysis to address the question of whether the obligation of directors to act in good faith is a separate, free-standing fiduciary duty, or a fundamental aspect of the core duty of loyalty.

We conclude, consistent with the Delaware Supreme Court's recent decision in Stone v. Ritter, that in the American corporate law tradition, the basic definition of the duty of loyalty is the obligation to act in good faith to advance the best interests of the corporation. What this article also shows is that the duty of loyalty has traditionally been conceived of as being much broader than the duty to avoid acting for personal financial advantage. The duty of loyalty also precludes acting for unlawful purposes, and affirmatively requires directors to make a good faith effort to monitor the corporation's affairs and compliance with law.

Finally, we highlight a critical policy implication resulting from Stone v. Ritter, which is that an independent director who is accused of having failed in her monitoring duties may only be held liable if a court finds that she breached her duty of loyalty by consciously failing to make a good faith effort to comply with her duty of care. By requiring a finding of bad faith before imposing liability on an independent director, the corporate law, as explicated by Stone, protects the policy interests underlying the business judgment rule from erosion.

Number of Pages in PDF File: 70

Keywords: Good faith, Loyalty, Fiduciary duties, Corporate governance, Directors, Boards, Shareholders, Director liability, Monitoring

JEL Classification: D70, G30, G32, G34, G38, K22

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Date posted: February 27, 2009 ; Last revised: March 9, 2012

Suggested Citation

Strine , Leo E. and Hamermesh, Lawrence A. and Balotti, R. Franklin and Gorris, Jeffrey M., Loyalty's Core Demand: The Defining Role of Good Faith in Corporation Law (February 26, 2009). Georgetown Law Journal, Vol. 93, p. 629, 2010; Widener Law School Legal Studies Research Paper No. 09-13; Harvard Law and Economics Discussion Paper No. 630. Available at SSRN: http://ssrn.com/abstract=1349971

Contact Information

Leo E. Strine Jr.
Government of the State of Delaware - Supreme Court of Delaware ( email )
820 N. French Street
P.O. Box 1997
Wilmington, DE 19801
United States
Harvard Law School ( email )
1563 Massachusetts Ave
Cambridge, MA 02138
United States
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
Lawrence A. Hamermesh (Contact Author)
Widener University School of Law ( email )
PO Box 7474
Wilmington, DE 19803
United States
302-477-2132 (Phone)
302-477-2257 (Fax)
R. Franklin Balotti
Richards, Layton & Finger ( email )
One Rodney Square
PO Box 551
Wilmington, DE 19899
United States
302-651-7710 (Phone)
302-658-6548 (Fax)
Jeffrey M. Gorris
Morris, Nichols, Arsht & Tunnell, Attorneys At Law ( email )
1201 North Market Street, 18th Floor
P.O. Box 1347
Wilmington, DE 19899-1347
United States
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