In Stone v. Ritter, (Del. Supr., Nov. 6, 2006), the Delaware Supreme Court yesterday clarified its position on whether "good faith" is a separate stand-alone duty, in the same way as loyalty and due care are. Read opinion here.
Prof. Gordon Smith suggests that the court "drove a stake" in the concept of a stand alone duty of good faith. See his comments here. The money quote from the Delaware High Court’s decision as selected by Gordon follows:
It is important, in this context, to clarify a doctrinal issue that is critical to understanding fiduciary liability under Caremark as we construe that case. The phraseology used in Caremark and that we employ here—describing the lack of good faith as a "necessary condition to liability"—is deliberate. The purpose of that formulation is to communicate that a failure to act in good faith is not conduct that results, ipso facto, in the direct imposition of fiduciary liability. The failure to act in good faith may result in liability because the requirement to act in good faith "is a subsidiary element[,]" i.e., a condition, "of the fundamental duty of loyalty." It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.
This view of a failure to act in good faith results in two additional doctrinal consequences. First, although good faith may be described colloquially as part of a "triad" of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith. As the Court of Chancery aptly put it in Guttman, "[a] director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation’s best interest."
Several weeks ago after an all-day seminar on the concept of good faith in Delaware jurisprudence, I blogged here about some members of the panel who rejected the view of good faith as a stand-alone duty. It appears that, after the opinion of yesterday, they were prescient.
UPDATE: Prof. Eric Chiappinelli has also commented on the case. His comments are here.