8/13/2019 Writing Assignment 6

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Amanda Weiner Writing Assignment #6

The concept of good faith in the context of directors duty to a corporation has been a

troublesome issue for the courts. While it is clear that directors owe seeral fiduciary duties to

the corporation! there was a "uestion as to whether or not good faith was a fiduciary duty itself orif it fell somewhere in the realm of the duty of care or duty of loyalty. After the enactment of

$%& '()*+b,+-,! which limited the ris of liability for directors by proiding a list of

exceptions! there appeared to be a triad of fiduciary duties/ duty of care! duty of loyalty! dutyof good faith. 0eeral cases! such asIn re The Walt Disney Co.! supported the apparent need for

good faith to be a separate entity. 1oweer! a short time after in Stone v. Ritterit was determined

that good faith is now iewed as a branch of the duty of loyalty/ a breach of good faith is clearlya iolation of the duty of loyalty.

TheDisneycase inoled claims of a breach of the duty of care! good faith! and waste. 2n

regards to the claim that directors acted in bad faith! the %ourt found that a iolation of good

faith cannot be e"uated to a duty of care iolation. To proe that there was a lac of good faithre"uires something more than a showing of gross negligence +which is the standard for a duty of

care iolation,. 2n addition to conduct motiated by sub3ectie bad intent! The %ourt determined

that the concept of intentional dereliction of duty! a conscious disregard for ones

responsibilities! is an appropriate +although not the only, standard for determining whetherfiduciaries hae acted in good faith. +In re The Walt Disney Co. p. 456,. While this case helped

to further define good faith! it still remained unclear as to how this duty fit into the broaderscheme and whether or not it was a distinct fiduciary duty.

In re Caremarkassisted this analysis by proiding a duty to monitor rule. irectors

hae a responsibility to assure that an ade"uate system exists for receiing corporate informationand reporting. 0ome monitoring system must be in place in order to satisfy the obligation that

directors need to be ade"uately informed. According to the court! directors would be liable if

there is a sustained or systematic failure to exercise oersight sufficient to indicate a lac of good

faith.The more recent case of Stone v. Ritterdealt with a similar %aremartype claim of a

failure to monitor and the issue of good faith. 2n this case! the %ourt adopted the iew expressedin Caremarkand stated that oersight +failure to monitor, was an issue of good faith. The %ourtalso expressed support for the example of the failure to act in good faith that was expressed in

Disney. 2n Stone! howeer! the %ourt furthered the meaning of good faith by stating that an utter

failure to create a reporting system or a failure to monitor when a reporting system is in placelimits the ability of directors to be informed! and thus a lac of good faith that is a necessary

condition to liability exists. 2n other words! acting in bad faith must inole a conscious

disregard on the part of the directors7 directors cannot be held liable simply because employees

hae acted in the wrong manner! and rather directors themseles must hae intentionally actedpoorly.

Stonealso addressed the fact the test for good faith must be set at a high standard in order

to ensure that directors will perform their duties to the corporation. 8ore importantly! the failureto act in good faith doesnt itself impose liability but does so because good faith is a subsidiary

element of the duty of loyalty. Therefore! it was determined that good faith is not an

independent duty but the lac of good faith means that the directors are not acting in the bestinterest of the company and they are breaching their duty of loyalty. 9egardless! proing good

faith is still a difficult issue to proe simply because the standard is set at such a high leel.