Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law

59 Pages Posted: 27 Oct 2005

Abstract

The Delaware General Corporation Law was amended in 1986 to permit shareholder-approved exculpatory charter provisions shielding corporate directors from monetary liability for certain fiduciary duty breaches not including (among other things) breaches of the duty of loyalty and acts not in good faith. This article examines the development of corporate fiduciary duty doctrine in Delaware leading up to and following this statutory amendment, focusing particularly on the Delaware courts' evolving conception of the meaning and doctrinal status of the good faith concept employed in recent cases to permit a non-exculpable cause of action for conscious nonfeasance.

The article argues that Delaware's good faith case law and statutory exculpation regime rendered the fiduciary duty framework internally contradictory and practically unworkable. A remedy is proposed in the form of a statutory amendment replacing the exculpation regime with a provision permitting the imposition of monetary liability only for loyalty breaches, defined broadly to reach cases of conscious nonfeasance recently styled by the courts as evidencing a lack of good faith. In so doing, the article argues that good faith should be treated as a component of the fiduciary duty of loyalty, and advocates a doctrinal framework substantially similar to that adopted by the Delaware Supreme Court in its Stone v. Ritter opinion (discussed in the article's postscript).

Keywords: corporate law, corporate governance, fiduciary duties, good faith, business judgment rule, exculpation

JEL Classification: K22

Suggested Citation

Bruner, Christopher M., Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law. Wake Forest Law Review, Vol. 41, p. 1131, 2006; Boston Univ. School of Law Working Paper No. 05-19. Available at SSRN: https://ssrn.com/abstract=832944

Christopher M. Bruner (Contact Author)

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

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