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


The Delaware General Corporation Law was amended in 1986 to permit shareholder-approved exculpatory charter provisions shielding directors from monetary liability for certain types of fiduciary duty breaches, explicitly excepting breaches of the duty of loyalty and conduct not in "good faith" – evidently distinct concepts in the Delaware legislature’s view. This paper 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 good faith. Specifically, the paper argues that Delaware's statutory exculpation regime and good faith case law – built on the flawed premise that the good faith concept can be imbued with a coherent set of positive content unrelated to the loyalty concept of which it is derivative – have together rendered the fiduciary duty framework internally contradictory and effectively unworkable.

The paper proposes a remedy 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 to include those cases of conscious nonfeasance (that is, board inaction in the face of a known duty to act) recently styled by Delaware's Court of Chancery as conduct lacking good faith. The proposed regime, it is argued, would generally track what Delaware case law has permitted with regard to monetary liability for breaches of fiduciary duty, while offering substantial benefits over the current regime in the form of a conceptually coherent system that is workable for courts; comprehensible by market actors desiring to assess the risks to which they expose themselves by accepting board positions; and doctrinally consistent with the historical meaning and significance of the core fiduciary duties of care and loyalty.


Agency | Business Organizations Law | Jurisprudence | Legal Remedies | Legislation

Date of this Version

March 2006