Amanda Weiner

Writing Assignment #6

The concept of good faith in the context of directors duty to a corporation has been a troublesome issue for the courts. While it is clear that directors owe se eral fiduciary duties to the corporation! there was a "uestion as to whether or not good faith was a fiduciary duty itself or if it fell somewhere in the realm of the duty of care or duty of loyalty. After the enactment of #$%& '()*+b,+-,! which limited the ris. of liability for directors by pro iding a list of exceptions! there appeared to be a triad of fiduciary duties/ duty of care! duty of loyalty! duty of good faith. 0e eral cases! such as In re The Walt Disney Co.! supported the apparent need for good faith to be a separate entity. 1owe er! a short time after in Stone v. Ritter it was determined that good faith is now iewed as a branch of the duty of loyalty/ a breach of good faith is clearly a iolation of the duty of loyalty. The Disney case in ol ed claims of a breach of the duty of care! good faith! and waste. 2n regards to the claim that directors acted in bad faith! the %ourt found that a iolation of good faith cannot be e"uated to a duty of care iolation. To pro e that there was a lac. of good faith re"uires something more than a showing of gross negligence +which is the standard for a duty of care iolation,. 2n addition to conduct moti ated by sub3ecti e bad intent! The %ourt determined that the concept of intentional dereliction of duty! a conscious disregard for ones responsibilities! is an appropriate +although not the only, standard for determining whether fiduciaries ha e acted in good faith. +In re The Walt Disney Co. p. 456,. While this case helped to further define good faith! it still remained unclear as to how this duty fit into the broader scheme and whether or not it was a distinct fiduciary duty. In re Caremark assisted this analysis by pro iding a duty to monitor rule. #irectors ha e a responsibility to assure that an ade"uate system exists for recei ing corporate information and reporting. 0ome monitoring system must be in place in order to satisfy the obligation that directors need to be ade"uately informed. According to the court! directors would be liable if there is a sustained or systematic failure to exercise o ersight sufficient to indicate a lac. of good faith. The more recent case of Stone v. Ritter dealt with a similar %aremar.6type claim of a failure to monitor and the issue of good faith. 2n this case! the %ourt adopted the iew expressed in Caremark and stated that o ersight +failure to monitor, was an issue of good faith. The %ourt also expressed support for the example of the failure to act in good faith that was expressed in Disney. 2n Stone! howe er! the %ourt furthered the meaning of good faith by stating that an utter failure to create a reporting system or a failure to monitor when a reporting system is in place limits the ability of directors to be informed! and thus a lac. of good faith that is a necessary condition to liability exists. 2n other words! acting in bad faith must in ol e a conscious disregard on the part of the directors7 directors cannot be held liable simply because employees ha e acted in the wrong manner! and rather directors themsel es must ha e intentionally acted poorly. Stone also addressed the fact the test for good faith must be set at a high standard in order to ensure that directors will perform their duties to the corporation. 8ore importantly! the failure to act in good faith doesnt itself impose liability but does so because good faith is a subsidiary element of the duty of loyalty. Therefore! it was determined that good faith is not an independent duty but the lac. of good faith means that the directors are not acting in the best interest of the company and they are breaching their duty of loyalty. 9egardless! pro ing good faith is still a difficult issue to pro e simply because the standard is set at such a high le el.