Wednesday, July 12, 2006

Delaware Court Nails Duty to Act in Good Faith

After sailing through uncharted waters beset by the fog of hazy jurisprudence, the Delaware courts have arrived in the sunny uplands of a clear duty to act in good on the part of corporate fiduciaries. In its recent ruling in the Walt Disney Company Securities Litigation, the Delaware Supreme Court held that a duty to act in good faith exists on two different levels. The first level is the concept that it is bad faith when a corporate fiduciary's conduct is motivated by an actual intent to do harm. The second level is that bad faith is evidenced when a corporate fiduciary engages in an intentional dereliction of duty. This second type of bad faith occurs when corporate officers and directors, with no conflicting self-interest in a decision, still engage in misconduct that is more culpable than simple inattention or failure to be informed of all the material facts. Thus, t
he duty of good faith has been defined by reference to what is bad faith. I believe that this opinion squarely places squarely places the duty to act in good faith in the same pantheon with the traditional duties of due care and loyalty. As with many doctrines in Delaware corporate governance, the duty to act in good faith developed in an evolutionary manner and did not spring full-blown from the head of Zeus.