Good Faith in the World of Delaware Corporate Litigation: A Strategic Perspective on Recent Developments in Fiduciary Duty Law[dagger]

I.

INTRODUCTION

Delaware corporate law, and American corporate law through extension,1 has long been shaped by the agency of "the most scrupulous . . duty" of officers and directors to "affirmatively . . protect the interests of the corporation" and "to refrain from doing anything that would work injury to" it.2 Traditionally, this what one is bound [i]or[/i] under obligation to do has been distilled by courts into the twin fiduciary obligations of care and loyalty.3 The what one ought to do of care compels directors "to act upon an informed basis" when exercising their power to manage the corporation's affairs.4 In turn round the duty of loyalty demands "that the best interest of the corporation and its shareholders take[] anteriority over any interest possessed through a director, officer or controlling shareholder and not shared by means of the stockholders generally."5

Although the leading Court of Delaware has described one as well as the other duties as "equal and independent,"6 the what one is bound [i]or[/i] under obligation to do of care has assumed les prominence in Delaware shareholder derivative lawsuits since the legislature allowed corporations to exculpate their directors from liability for greatest in quantity fiduciary duty violations that do not involve disloyalty or bad faith.7 Until newly Section 102(b)(7) and other aspects of Delaware corporate law effectively shielded all on the contrary the most obviously culpable managers and directors from liability or trial.8

But in the years since Enron and other corporate scandals directed the nation's attention to corporate governance issues, Delaware courts seemingly have become more receptive to the claims of shareholder plaintiffs. Although the courts generally have reframed from expressly overruling prior cases, many commentators believe that the protective tendency of Section 102(b)(7) has been sharply diminished by means of good faith, a nebulous universal lying somewhere between grossly negligent lack of care and intentional, self-interested disloyalty.

By way of background, this article begins with a brief history of the what one ought to do of care and its de facto marginalization in derivative lawsuits through Section 102(b)(7). It then traces the deliberate development of good faith as an independent fiduciary obligation, culminating in the much-hyp denial of the defendants' motion to dismiss in the Disney litigation.19 Since that decision, academic commentators have inked centurys of pages trying to decipher the exact contours of serviceable faith, either distinguishing or equating it with care or loyalty. The article briefly reviews the academic analysis, examining several theories that attempt to shape beneficial faith into a coherent and workable framework. However, the article does not seek for to arrive at any theory that could comprehensively explain the limits of advantageous faith conduct.

Instead, it describes in what way recent developments in Delaware law have made the procedural landscape in which advantageous faith is litigated more important than the exact definition of advantageous faith in determining whether a certain quantity of directors will be subject to monetary damages. With an organ of vision toward the practical effects of fiduciary what one is bound [i]or[/i] under obligation to do jurisprudence, the article follows the path of a typical shareholder lawsuit from injury to sagacity noting where good faith has combined with other state and federal exhibitions to change the fortunes of plaintiff shareholders and defendant directors.

The article bring to an ends that recent developments in federal and state law, and in the sways of Self-Regulatory Organizations ("SRO's"), have substantially altered Delaware's litigation playing field through their cumulative effect, favoring shareholder plaintiffs as a rise By recognizing a cause of action against directors who violate their fiduciary responsibilities without being outright disloyal, Delaware courts have made it virtually impossible for directors who breached their what one is bound [i]or[/i] under obligation to do of care to win dismissals of shareholder lawsuits upon the pleadings. Consequently, an increasing number of fiduciary what one ought to do claims can be expected to survive a motion to dismiss, thereby raising the adjustment value of such claims. Furthermore, those directors who fail to seat are likely to bear a heavy evidentiary load at trial. In sum, the novel Delaware corporate jurisprudence will arise at least in the near confine in an increasing number of adjustments and judgments favorable to plaintiffs.

II.

THE RISE AND FALL OF THE what one ought to do OF CARE AS A CAUSE FOR DIRECTOR LIABILITY

Although the what one is bound [i]or[/i] under obligation to do of care has long been an simple body of Delaware corporate law, it traditionally had not been considered more than an "aspirational and unenforceable standard" in the connected thought [i]or[/i] thoughts of suits for monetary damages against directors.10 on the contrary Delaware's laxity with regard to the what one ought to do of care has at least single glaring exception. In Smith v Van Gorkom, the Delaware highest Court overturned the Chancery Court's dismissal of a complaint that accused the directors of the Trans Union Corporation of breaching their what one ought to do of care in the course of approving a merger11 Although the defendants had not been accused of "fraud, bad faith, or self-dealing," the court conclud that directors could not satisfy their fiduciary duties end loyalty or good faith alone.12 In addition, they were obligated to reasonably inform themselves of all relevant information before making important corporate decisions and could be held personally liable for grossly negligent failures to raise this obligation.13