Monitoring Caremark’s Good Faith

Hillary A. Sale

Former Chancellor Allen’s opinion In re Caremark International Inc. Derivative Litigation is destined to be one of the most prominent Delaware opinions of all time. This article, which is based on the author’s 2006 Francis G. Pileggi Lecture, celebrates the opinion and updates its message, focusing on the fiduciary good-faith obligation and its connection to the role of directors as monitors and to corporate governance more generally. Caremark is the starting point for understanding the good-faith obligation and its contours. It is an opinion where the court’s rhetoric shifts from care to good faith, pushing fiduciaries to understand that some conduct, not amounting to a traditional, financially-conflicted loyalty breach, is sufficiently egregious that it crosses the line from the context of care into good faith. The result was an update on fiduciary conduct and duties that pushed directors to reconsider their affirmative monitoring and oversight obligations. The article also explores the increasing role of federal law in regulating directors’fiduciary duties and the ways in which it has begun to occupy what was the domain of the states. The result of Caremark and its progeny, along with the changes in federal law, is a good-faith obligation that is increasingly significant to fiduciaries, to those who observe them, and to understanding corporate governance. This article develops a theory of the good-faith obligation and explores its implications in the context of recent corporate-governance scandals. It also sets forth a theory for today’s key good-faith question: what is a so-called “red flag ?”