Making Sense of Good Faith in Delaware Corporate Fiduciary Law: a Contractarian Approach

David Rosenberg

Following the Delaware Supreme Court’s momentous decision imposing a strict negligence standard on corporate directors in Smith v. Van Gorkom in 1985, the Delaware legislature passed Section 102(b)(7) of the state’s General Corporation Law, allowing corporations to limit director liability for breach of fiduciary duty, but specifically not for breaches of the duties of loyalty or good faith. In the years since the statute was passed, Delaware courts have offered inconsistent definitions of these terms. While the supreme court has held that fiduciary duty consists of a “triad” of loyalty, care, and good faith, the court of chancery has repeatedly held that good faith is merely a “subsidiary” of loyalty and not a separate duty.

Because Delaware is the most contractarian jurisdiction (i.e., willing to allow parties to business organizations to craft the limits of their obligations), it is appropriate to inquire whether Delaware courts should interpret good faith in the corporate context in the same way that they use that term in the contractual context. Approaching the inconsistency from this perspective reveals that the director’s duty of good faith encompasses both the duties of loyalty and care. Even in the corporate context, courts should use the term “goodfaith” to determine whether directors knowingly complied with the obligations (among them, loyalty and care) to which they willingly submitted themselves when they became corporate directors. By viewing good faith in this way, we can reconcile the competing language used by the supreme court, the court of chancery, and Section 102(b)(7).