Duty of Good Faith | Brian JM Quinn | November 15, 2013


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Duty of Good Faith

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide

The ubiquity of exculpation provisions in charters as well as precedent like Malpiede v. Townson have made it extremely difficult – if not impossible – for shareholder plaintiffs to succeed on claims that simply allege violations of the duty of care. In response to foreclosing that avenues, shareholder plaintiffs have brought other theories to court in attempts to generate monetary liability for otherwise disinterested directors when their decision-making process has fallen short of the mark.

Duty of good faith claims are just one such theory. In the good faith claims, plaintiffs argue that otherwise disinterested directors inaction or decision-making was so poor that it exceeds gross negligence – the standard of a duty of care claim – and rises to the level of a violation of the duty of good faith.

The object of these theories is to work around the limitations of exculpation provisions. To the extent they are successful, such theories might be able to generate monetary liability for disinterested directors.

Courts have heard these theories and have responded by narrowing the possible set of circumstances of a successful good faith claim.


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  1. 1 Show/Hide More Oversight Claims
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    It is not uncommon that when a corporation makes a decision that results in a loss for the corporation that stockholders will be unhappy. In some cases, stockholders may well sue the board for the lack of propriety of the decision leading to the loss.  However, absent some indicia of a violation of the duty of loyalty, such claims are a very thin reed upon which to rest one's litigation hopes. Oftentimes, plaintiffs will advance a theory that directors violated their duty of good faith due to inadquate oversight of the corporation leading to a nonexculpable loss. In one such case, Caremark, the court noted the good faith theory advanced by the plaintiffs “is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”

    Following the financial crisis of 2008, plaintiffs brought a series of claims against the major banks alleging directors failed in their oversight obligations of the banks leading to catastrophic losses. Citigroup demonstrates just how difficult it is for plaintiffs to win on this legal theory. 

    1. 1.1 Show/Hide More Stone v. Ritter
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      A common good faith claim is that directors violated their duty of good faith the corporation by failing to provide adequate oversight, resulting in avoidable losses to the corporation. These “oversight claims” are also known as Caremark claims after a case where the issue of oversight liability was dealt with in dicta.  In Stone, the Delaware Supreme Court adopts the reasoning of Caremark and applies the standard to facts before it. 
    2. 1.2 Show/Hide More In re Citigroup Inc. Shareholder Derivative Litigation
      Original Creator: Brian JM Quinn

      In the wake of the Financial Crisis of 2008, stockholders were rightly upset. Boards of corporate America took what in hindsight appear to have been excess risk and helped push the entire economy to the brink of collapse. The case that follows, Citigroup, is typical of the derivative claims brought following the financial crisis.  In essence, the plaintiffs argument is that the defendant board mismanaged the company and missed obvious signs (‘red flags') that things were heading in the wrong direction.  

      Stockholders seek to hold directors accountable for the resulting failure in corporate performance. These claims are a version of “Caremark” oversight claims. Though rather than charging directors with missing misconduct of corporate officers, plaintiffs are charging directors with taking on excessive business risk. Remember, such claims must take the form of derivative claims. Consequently, plaintiffs must plead demand futility. This opinion is an opinion on a Rule 23.1 motion to dismiss. 


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August 13, 2014

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