The Convergence of Good Faith and Oversight


In Stone ex rel. AmSouth Bancorporation v. Ritter, two important strands of Delaware corporate law converged; namely, the concept of good faith and the duty of directors to monitor the corporation’s employees for law compliance. As to the former, Stone put to rest any remaining question as to whether acting in bad faith is an independent basis of liability under Delaware corporate law, stating that “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.” Nevertheless, this holding may not matter much, because the Stone court made clear that acts taken in bad faith breach the duty of loyalty. As a result, instead of being recognized as a separate fiduciary duty, good faith has been subsumed by loyalty. In this sense, Stone looks like a compromise between those scholars and jurists who wanted to elevate good faith to being part of a triad of fiduciary duties and those who did not, with the former losing as a matter of form, and the latter losing as a matter of substance.

As to the duty of oversight, Stone confirmed former chancellor William Allen’s dicta in In re Caremark International Inc. Derivative Litigation that the fiduciary duty of care of corporate directors includes an obligation for directors to take some affirmative law compliance measures. In Stone, the Delaware Supreme Court confirmed “that Caremark articulates the necessary conditions for assessing director oversight liability.”

This Article argues that the convergence of good faith and oversight is one of those unfortunate marriages that leave both sides worse off. New and unnecessary doctrinal uncertainties have been created. This Article identifies those uncertainties and suggests how they should be resolved.

About the Author

Stephen M. Bainbridge is a William D. Warren Professor at the UCLA School of Law.|Stephen M. Bainbridge is a William D. Warren Professor at the UCLA School of Law.|Stephen M. Bainbridge is a William D. Warren Professor at the UCLA School of Law.

By uclalaw