Delaware's Good Faith

Abstract

In the post-Enron era, there has been considerable discussion about what went wrong at Enron and elsewhere and how to fix it. Congress passed the Sarbanes-Oxley Act, the New York Stock Exchange adopted new corporate governance regulations designed to create better checks and balances, and other self-regulatory organizations followed suit. In addition, the Securities and Exchange Commission, both before and after the Sarbanes-Oxley Act, promulgated many new regulations. One voice, however, has been fairly quiet. The State of Delaware, the mother of all corporate law, has been largely absent from the debate.

The Delaware judiciary, however, has issued several opinions that indicate movement may be afoot. In this Article, I raise some questions about Delaware's (declining) role in corporate law, and discuss the emerging duty of good faith and its potential for curbing abuses like those seen in the past few years. To do so, I examine several key cases from Smith v. Van Gorkom, to Caremark, to the Disney cases. In these, and other cases, I argue, the judiciary has put forth a set of guiding principles for fiduciary good faith. I argue that this duty is appropriately a separate duty, not an obligation on the other two key fiduciary duties of due care and loyalty. I compare the Delaware cases and the standards within them to the standard for pleading and proving scienter under the federal securities laws. Using the federal standard as a jumping off point, I argue that the duty of good faith can be analogized to the types of situations involving scienter and, thereby, limited in a meaningful manner. As a result, good faith can help to fill the gap in fiduciary duties without becoming excessively capacious.

Keywords: Delaware, Good Faith, Fiduciary Duty, Corporate Governance

JEL Classification: GE, KO, K2