Opting Out of Good Faith

63 Pages Posted: 10 Mar 2009 Last revised: 10 Aug 2009

Andrew Lund

Villanova University School of Law

Date Written: August 7, 2009

Abstract

Over the past decade, the doctrine of good faith provided the central front in battles over directors’ fiduciary duties under Delaware law. Good faith played that role accidentally, through the Delaware legislature’s historically arbitrary determination that directors’ violations of good faith cannot be exculpated via charter amendment. Whether the duty of good faith was violated was – and is – often the operative question for determining director liability. In its most recent iteration, a director’s “conscious disregard of duties” will violate the duty of good faith and, consequently, will be non-exculpable. If robustly applied, the conscious disregard standard threatened to swallow up the kind of duty of care claims that are expressly exculpable under most Delaware firms’ charters. If applied more too restrictively, as the Delaware Supreme Court recently did in Ryan v. Lyondell Chemical Co., the conscious disregard standard would cease to be meaningful. Given the uncertainty surrounding the value of these competing considerations, this Article contends that any attempt to calibrate the proper application of “conscious disregard” was bound to err in one direction or the other. Instead, the optimal solution would have been for (1) courts to ensure the advantages of targeted culpability determinations through a robust version of the conscious disregard standard and (2) the legislature to permit firms to precommit and opt out of that standard. Although the Supreme Court’s recent decision may have effectively foreclosed this path by reducing the pressure on the legislature to act, the story of “good faith” serves as a reminder that mandatory rules in corporate law should be heavily scrutinized, else they lead to inefficient results, whether contemplated or not.

Keywords: good faith, exculpation, due care, conscious disregard

JEL Classification: k22

Suggested Citation

Lund, Andrew, Opting Out of Good Faith (August 7, 2009). Florida State University Law Review, Vol. 37, 2010. Available at SSRN: https://ssrn.com/abstract=1356127

Andrew Lund (Contact Author)

Villanova University School of Law ( email )

299 N. Spring Mill Rd.
Villanova, PA 19085
United States

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