Good faith? Good luck! Two recent court decisions look to be embracing a new judicial device for finding liability.

• Author: Ferrara, Ralph C.
• Position: Legal Brief

COURTS HAVE NOT always clearly articulated a director's fiduciary duty to act in good faith--sometimes discussing it in the context of whether a director has met his or her duty of loyalty or care, while at others interpreting it as an independent duty that imposes criteria in addition to those imposed by the duties of care and loyalty. Two recent cases interpreting Delaware law, one rendered by the Delaware Court of Chancery and the other by the Seventh Circuit Court of Appeals, suggest that courts may be moving toward interpreting the duty of good faith as a distinct fiduciary duty with its own autonomous doctrine.

The first case, In re Walt Disney Company Derivative Litigation, concerns an unusually favorable compensation package and a large severance payment given to Michael Ovitz, the company's former president. The Delaware Chancery Court found that plaintiffs alleged sufficient facts that, if true, showed that the Disney board failed to act in good faith. Among other findings, the court was troubled that the final version of Ovitz's employment agreement differed materially from the draft previously submitted to the compensation committee, and that Disney CEO Michael Eisner, without any evidence of consulting with the board or the compensation committee as apparently required by the company's bylaws, negotiated a generous no-fault termination agreement with Ovitz.

The court found that, if true, these facts portrayed a board that not only failed to inform itself--to act in accordance with its fiduciary duty of due care--but also recklessly failed to exercise any business judgment at all. The facts presented, the court held, showed a board that not only failed to deliberate and acted with gross negligence, but also "consciously and intentionally disregarded their responsibilities" and failed to make any good-faith effort to act in accordance with its fiduciary duties.

In In re Abbott Laboratories Derivative Shareholders Action, a recent Seventh Circuit case construing Delaware law, the court similarly found that the board failed to act in good faith. In Abbott, plaintiffs alleged that the board breached its fiduciary duties by negligently failing to address the company's six-year history of FDA violations and failing to act with due diligence by signing SEC filings that specifically addressed relevant government regulations without disclosing the violations.

Reversing the district court, the Abbott Court distinguished the case from In...