Three's Company: Stone v. Ritter and the Improper Characterization of Good Faith in the Fiduciary Duty 'Triad'

44 Pages Posted: 6 Dec 2009 Last revised: 18 Dec 2009

See all articles by Andrew D. Appleby

Andrew D. Appleby

Stetson University College of Law

Matthew D. Montaigne

Alston & Bird LLP

Date Written: December 5, 2009

Abstract

In Stone v. Ritter, the Delaware Supreme Court attempted to end the debate revolving around good faith’s role in director fiduciary liability. The Stone court finally cleared up some doctrinal issues when it explicitly stated that good faith is not a freestanding duty on the level of care and loyalty. However, the court created a host of new questions and concerns - particularly in director oversight cases - when it included good faith solely as a subsidiary element of the duty of loyalty. The Stone court incorrectly held that the fiduciary duty of loyalty is not limited to cases involving a conflict of interest; loyalty also now encompasses director oversight cases. The court should have recognized that good faith is a necessary subsidiary element of both the duty of loyalty and the duty of care, and left director oversight in the realm of care.

The extent of director oversight liability under Stone remains to be seen. Whether the Chancery can appropriately apply the reformulated Caremark/Disney standard is anybody’s guess. If the recent contradictory decisions in Bear Stearns, Ryan, and Bridgeport are any indication, clarity and consistency in Delaware fiduciary law is a chimera.Fortunately, the Delaware Supreme Court’s cogent analysis in Lyondell, however, should provide some much needed post-Stone guidance.

In the wake of the current economic crisis, the Delaware courts need to recognize that the Stone formulation of good faith is inaccurate. The Delaware courts must also recognize that good faith is the overarching fiduciary goal, and thus, a necessary element of both the duty of loyalty and the duty of care.

This article examines Stone, including the factual basis and rationale of both the Chancery Court and the Delaware Supreme Court. This article then provides a concise history of Delaware’s constant repositioning of directors’ fiduciary duties. The article then analyzes the Delaware Supreme Court’s doctrinal shift regarding good faith and the duty of loyalty. This analysis includes both the conceptual and practical implications of good faith as a component of loyalty. This article also analyzes the Stone court’s improper repositioning of Caremark cases solely into the realm of loyalty. Additionally, this article analyzes the potential changes in section 102(b)(7) after the Delaware Supreme Court’s improper shift of good faith from care to loyalty, as well as the most recent - and inconsistent - post-Stone cases. This article concludes with a glance at the future of director liability and a proposed solution to the new quagmire presented by Stone. In brief, the Delaware courts need to recognize that good faith is the overarching fiduciary goal, and thus a necessary element of both the duty of loyalty and the duty of care. Further, the Delaware courts need to reverse Stone’s reframing of director oversight claims as primarily loyalty claims and reincorporate the appropriate Caremark duty of care framework.

Keywords: Delaware, fiduciary, duty, good faith, good, faith, care, loyalty, director oversight, Caremark, corporate, law, stone, ritter, lyondell, ryan, bridgeport, gantler, stephens, director, officer, liability, triad, chancery, Bear Sterns, Disney, wake, 102(b)(7)

JEL Classification: K2, K20, K22

Suggested Citation

Appleby, Andrew D. and Montaigne, Matthew D., Three's Company: Stone v. Ritter and the Improper Characterization of Good Faith in the Fiduciary Duty 'Triad' (December 5, 2009). Arkansas Law Review, Vol. 62, pp. 431-474, 2009, Available at SSRN: https://ssrn.com/abstract=1519085

Andrew D. Appleby (Contact Author)

Stetson University College of Law ( email )

1401 61st Street South
Gulfport, FL 33707
United States
727.562.7327 (Phone)

Matthew D. Montaigne

Alston & Bird LLP ( email )

950 F Street, NW
1201 W. Peachtree Street
Washington, DC 20004-1404
United States

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