GOOD FAITH, FIDUCIARY DUTIES,

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1 GOOD FAITH, FIDUCIARY DUTIES, AND THE BUSINESS JUDGMENT RULE IN DELAWARE Clark W. Furlow * TABLE OF CONTENTS I. INTRODUCTION II. THE IMPORTANCE OF GOOD FAITH III. GOOD FAITH IS NOT AN INDEPENDENT FIDUCIARY DUTY IV. DIRECTORS DUTIES AND GOOD FAITH A. The Statutory Duties of Directors B. The Fiduciary Duties of Directors C. Good Faith and the Duty of Loyalty V. THE JURISPRUDENCE OF BAD FAITH A. Decisions Motivated by an Improper Purpose B. Decisions Motivated by Subjective Bad Faith C. Intentional Violation of Law D. Intentional Dereliction of Duty Good Faith and the Duty to Monitor Good Faith and Careless Decision-Making Dereliction of Duty versus Gross Negligence E. Lyondell Chemical Co. v. Ryan F. The Proper Role of Good Faith in Fiduciary Analysis VI. GOOD FAITH AND THE BUSINESS JUDGMENT RULE A. The Presumption of Care and Loyalty B. Rebutting the Presumption of Care C. Rebutting the Presumption of Loyalty Financial Interest Lack of Good Faith D. Establishing an Improper Motive Incidental Benefit to the Directors Affiliates Irrational Business Judgments VII. PROPOSED MODE OF JUDICIAL REVIEW OF GOOD FAITH VIII. CONCLUSION * 2009 Clark W. Furlow, is an Associate Professor of Law at Stetson University College of Law and serves at the College s Associate Dean of its Tampa Law Center. Professor Furlow wishes to thank the Honorable Andrew G.T. Moore II, Justice of the Delaware Supreme Court, retired, for his thoughtful comments and criticisms. He also wishes to express his gratitude to Sally A. Milano (she knows why), to Brian R. Dettman for his assistance, and to Stetson University College of Law for providing financial support for this Article. 1061

2 1062 UTAH LAW REVIEW [NO. 3 I. INTRODUCTION The Delaware courts frequently refer to a corporate director s duty of good faith. 1 However, they struggle to define it. 2 One Delaware judge described this struggle as a fog of hazy jurisprudence. 3 Delaware s inability to offer a clear, consistent conception of good faith is significant because, under Delaware statutory law, a director is not entitled to protection from personal liability for a decision that was not taken in good faith. 4 This Article argues that any effort to define good faith as an independent fiduciary duty is doomed to failure because the term describes a state of mind the honesty with which one holds a belief 5 whereas fiduciary duties define the way directors are to conduct themselves in office. 6 1 See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (holding that directors of a Delaware corporation are presumed to act on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company ), overruled by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); Cede & Co. v. Technicolor, Inc. (Cede II), 634 A.2d 345, 361 (Del. 1993) (referring to the duties of loyalty, care, and good faith as a triad of fiduciary duties). 2 See, e.g., Cede II, 634 A.2d at (containing two lengthy sections on the duty of loyalty and the duty of care, but not defining good faith). 3 In re Walt Disney Co. Derivative Litig. (Disney IV), 907 A.2d 693, 754 (Del. Ch. 2005). The long-running Disney stockholder derivative litigation involved an effort by stockholders to hold Disney s directors personally liable for hiring and then firing Michael Ovitz as the company s president under circumstances that allowed Mr. Ovitz to receive a severance package valued at $140 million after fourteen months of lackluster performance. Id. at The litigation produced five significant judicial decisions: In re Walt Disney Co. Derivative Litig. (Disney I), 731 A.2d 342, 380 (Del. Ch. 1998) (granting the defendants Rule 23.1 motion to dismiss for plaintiffs failure to allege with particularity facts that would excuse their failure to make pre-suit demand); Brehm v. Eisner (Disney II), 746 A.2d 244, 267 (Del. 2000) (affirming the dismissal of plaintiffs complaint and remanding with leave to file an amended complaint); In re Walt Disney Co. Derivative Litig. (Disney III), 825 A.2d 275, 291 (Del. Ch. 2003) (denying defendants Rule 23.1 motion to dismiss and holding the plaintiffs had adequately alleged bad-faith breaches of fiduciary duty that would excuse demand); In re Walt Disney Co. Derivative Litig. (Disney IV), 907 A.2d 693, (Del. Ch. 2005) (holding, in post-trial decision in favor of all defendants, that the evidence failed to demonstrate bad faith); and In re Walt Disney Co. Derivative Litig. (Disney V), 906 A.2d 27, 75 (Del. 2006) (affirming Disney IV). 4 See DEL. CODE ANN. tit. 8, 102(b)(7) (2001) (allowing a Delaware corporation to include a provision in its certificate of incorporation shielding its directors from personal liability from certain breaches of fiduciary duty, provided the breach did not involve an act or omission not in good faith ). 5 Good faith is defined as [a] state of mind consisting in (1) honesty of belief or purpose, (2) faithfulness to one s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage. BLACK S LAW DICTIONARY 713 (8th ed. 2004); see also Elizabeth A. Nowicki, A Director s Good Faith, 55 BUFF. L. REV. 457, (2007) (reviewing uses of the phrase good faith in fiduciary and other contexts

3 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1063 The duty of loyalty defines what the directors are to seek to accomplish i.e., the best interests of the corporation. 7 The duty of care defines how they are to pursue that goal i.e., by using that amount of care which ordinarily careful and prudent men would use in similar circumstances. 8 Good faith, on the other hand, describes the state of mind of a director who is acting in accordance with her duty of loyalty. The duty of loyalty requires that a director s corporate decision be based on a good-faith belief that it will serve the best interests of the corporation. 9 It is the absence of that belief that justifies imposing personal liability upon a director. Part II explains the importance of understanding the role of good faith in the analysis of directors fiduciary duties. Part III explains that good faith does not function as an independent fiduciary duty. Part IV examines the statutory and equitable sources of directors corporate duties and explains that good faith is the state of mind with which a director acts in compliance with her duty of loyalty. Part V traces the effort of Delaware courts to define good faith as the absence of bad faith and concludes that bad faith does not define good faith; rather, bad faith is defined as the absence of good faith. Part VI examines the role of good faith in the context of the business judgment rule. Finally, Part VII offers a definition of good faith consistent with the purpose of section 102(b)(7) of the Delaware Code, traditional understandings of directors fiduciary duties, and the business judgment rule. II. THE IMPORTANCE OF GOOD FAITH Delaware has long expected corporate directors to perform their duties in good faith. 10 The business judgment rule, by which Delaware courts review and concluding that good faith requires action that is intended to serve the best interests of the fiduciary s constituency). 6 BLACK S LAW DICTIONARY 543 (8th ed. 2004) (defining duty as a legal obligation that is owed or due to another and that needs to be satisfied ). 7 The duty of loyalty requires directors to protect the interests of the corporation committed to his charge, and at the same time it requires the director to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). 8 Disney IV, 907 A.2d at 749 (quoting Graham v. Allis-Chambers Mfg. Co., 188 A.2d 125, 130 (Del. Super. Ct. 1963)). This requires that the directors consider all material information reasonably available. Id. (quoting Disney II, 746 A.2d at 259). 9 Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003) ( A director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation s best interest. ). 10 See, e.g., Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000) (citing Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998)) (stating that directors are fiduciaries who owe good faith to the company and its stockholders ); Warshaw v. Calhoun, 221 A.2d 487, 493 (Del. 1966) (holding that directors are presumed to act in good faith); Guttman, 823

4 1064 UTAH LAW REVIEW [NO. 3 business decisions, creates a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. 11 The Delaware courts frequently recite this explanation of the business judgment rule, 12 but the phrase good faith is usually included as something of a rhetorical grace note; it has never provided the basis for the court to decide the matter before it. Good faith took on greater significance in 1986, when, in response to the Delaware Supreme Court s decision in Smith v. Van Gorkom, 13 the Delaware legislature adopted section 102(b)(7). 14 The statute allowed a Delaware corporation to include a provision in its certificate of incorporation shielding its directors from personal liability for breach of the duty of care. 15 The statute accomplishes this by A.2d at 506 (requiring directors to act in good faith); Bennett v. Breuil Petroleum Corp., 99 A.2d 236, 239 (Del. Ch. 1953) (holding that directors are presumed to act in good faith). 11 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (emphasis added); see also Kaplan v. Centex Corp., 284 A.2d 119, 124 ( The acts of directors are presumptively acts taken in good faith and inspired for the best interests of the corporation.... (quoting Warshaw v. Calhoun, 221 A.2d 487, 493 (Del. 1966)); Robinson v. Pittsburgh Oil Ref. Corp., 126 A. 46, 48 (Del. Ch. 1924) ( [T]he directors of the defendant corporation are clothed with that presumption which the law accords to them of being actuated in their conduct by a bona fide regard for the interests of the corporation whose affairs the stockholders have committed to their charge. ). 12 See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985); see also Citron v. Fairchild Camera and Instrument Corp., 569 A.2d 53, 69 (Del. 1989) (holding that the board s decision to approve the sale of the company was protected by the business judgment rule) A.2d 858. In Van Gorkom, the court held that a violation of the duty of care would support the imposition of personal, monetary liability on independent, disinterested directors who believed in good faith that they were serving the best interests of their company and its stockholders. Id. at 864. As a consequence, liability insurance for corporate directors became difficult to purchase and, when available, expensive. See EDWARD P. WELSH, ANDREW J. TUREZYN, & ROBERT S. SAUNDERS, FOLK ON THE DELAWARE GENERAL CORPORATION LAWS (5th ed. 2008). This created a concern that corporations might not be able to attract and retain qualified directors. Id. The Delaware legislature adopted section 102(b)(7) to address these problems. 14 DEL. CODE ANN. tit. 8, 102(b)(7) (2001). For a discussion of the process by which the Delaware legislature adopted section 102(b)(7), see Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability In Corporate Law, 41 WAKE FOREST L. REV. 1131, (2006) (describing the deliberations of the corporation law section of the Delaware State Bar Association, the body that drafted the statute and recommended its adoption to the General Assembly of the State of Delaware). 15 Section 102(b)(7) provides that the certificate of incorporation of a Delaware corporation may contain [a] provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director s duty of loyalty to the

5 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1065 permitting exculpation for every breach of fiduciary duty, with four exceptions. The important exceptions were (1) a breach of the fiduciary duty of loyalty, and (2) a breach of fiduciary duty involving an act[] or omission[] not in good faith. 16 Thus, directors of Delaware corporations would continue to be subject to personal liability for breach of the duty of loyalty and for acts or omissions not in good faith, but they could be protected from personal liability for a breach of the duty of care. This raised an important question: could a plaintiff transform an act or omission that violated the duty of care into a claim that would support the imposition of personal liability by showing that the careless act or omission was not in good faith? The analysis of this question got off to a poor start when, in 1993, the Delaware Supreme Court seemed to suggest that good faith functioned as an independent fiduciary duty. In Cede & Co. v. Technicolor, Inc. ( Cede II ), 17 the court explained that a plaintiff could rebut the business judgment rule s presumption that directors had based their decision on adequate information (in compliance with their duty of care) and a belief that the decision would serve the company s best interests (in compliance with their duty of loyalty) 18 by providing evidence that directors, in reaching their challenged decision, breached any one of the triads [sic] of their fiduciary dut[ies] good faith, loyalty or due care. 19 This triad of fiduciary duties appeared to elevate the concept of good faith to the status of an independent fiduciary duty on par with the traditional duties of loyalty and care. 20 Subsequent decisions repeated or paraphrased this language, bringing the weight of authority in support of this triadic definition of directors fiduciary duties. 21 However, none of these cases involved allegations of a breach of corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. DEL. CODE ANN. tit. 8, 102(b)(7) (2001). 16 Id A.2d 345 (Del. 1993). 18 Id. at The court noted the business judgment rule creates a presumption that in making a business decision, the directors of a corporation acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the company. Id. at 360 (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). 19 Id. at See Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1, (2006) (arguing that the court created an independent fiduciary duty of good faith); Hillary A. Sale, Delaware s Good Faith, 89 CORNELL L. REV. 456, 464 (2004) (same). 21 Emerald Partners v. Berlin, 787 A.2d 85, 91 (Del. 2001) ( [A] shareholder plaintiff has the burden of proving that the board of directors, in reaching its challenged decision, violated any one of its triad of fiduciary duties: due care, loyalty, or good faith. ); Cinerama Inc. v. Technicolor, 663 A.2d 1156, 1164 (Del. 1995) ( [A] shareholder plaintiff

6 1066 UTAH LAW REVIEW [NO. 3 the duty of good faith, and, therefore, none discussed the contours of this apparent duty of good faith. 22 Again, the phrase was merely rhetorical window dressing. As a consequence of this triadic view of fiduciary duties, the phrase good faith appeared to have taken on dual significance. As a matter of judge-made law, it appeared to be an independent fiduciary duty, and as a matter of statutory law, it was a duty the violation of which would necessarily expose a director to personal liability. III. GOOD FAITH IS NOT AN INDEPENDENT FIDUCIARY DUTY The first serious consideration of the meaning of good faith came in the Court of Chancery s decision in In re Caremark International, Inc. Derivative Litigation ( Caremark ). 23 That decision was thought by some to endorse the view that good faith functioned as an independent fiduciary duty. 24 The court held that a board s sustained and systematic failure to monitor its corporation s compliance with governing law would be evidence of an absence of good faith that would avoid the protection of an exculpation provision in the company s certificate of incorporation. 25 However, a closer reading of Caremark reveals the court did not apply the concept of good faith as if it were an independent fiduciary duty. Rather, the court held that a lack of good faith could be demonstrated by a board s failure to undertake a preexisting duty the statutory duty to monitor. 26 The duty to monitor derives from the directors statutory obligation to manage the business and affairs of the corporation. 27 Thus, good faith involves an obligation to meet one s preexisting duty. The duty to monitor implicates the duty of care. It requires directors to exercise reasonable care in designing a monitoring system. But the court did not hold that a failure to exercise care would demonstrate a lack of good faith. Rather, the court held that a lack of good faith would be evinced by a failure to even assumes the burden of providing evidence that the board of directors, in reaching its challenged decision, breached any one of its triad of fiduciary duties: good faith, loyalty, or due care. ). The term triadic was coined by academic commentators. See Eisenberg, supra note 20, at 5 6, (arguing in favor of a triadic conception of fiduciary duty). 22 In one case, the Delaware Supreme Court made remarks that seemed to suggest that bad faith would be required to establish a breach of the duty of good faith. Cinerama, 663 A.2d at In Cinerama, the court noted that Cede II involved only duty of care and duty of loyalty claims because the plaintiff had abandoned its claim of bad faith. Id. (citing Cede II, 634 A.2d at 359) A.2d 959 (Del. Ch. 1996). 24 Sale, supra note 20, at A.2d at Id. at 970. For a discussion of the duty to monitor, see infra notes and accompanying text. 27 DEL. CODE ANN. tit. 8, 141 (2001) (providing that the business and affairs of a Delaware corporation are under the management and direction of its board of directors).

7 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1067 attempt to perform the statutory duty to monitor. 28 A failure to perform a statutory duty to oversee the company s business affairs cannot be motivated by a belief that such a failure would serve the company s best interests. Thus, a systematic and sustained failure to perform this statutory duty would constitute a breach of the duty of loyalty. 29 The idea that good faith functioned as an independent duty was called into question in Chancellor Chandler s decision in Disney IV. 30 There, he acknowledged that an intentional dereliction of duty fell short of the board s obligation to act in good faith. 31 In the next sentence, however, the court made it clear that good faith was a component of the duty of loyalty and not a separate duty, stating that [d]eliberate indifference and inaction in the face of a duty to act is, in my mind, conduct that is clearly disloyal to the corporation. It is the epitome of faithless conduct. 32 The idea that good faith functions as an independent duty was put to rest by the Delaware Supreme Court s recent decision in Stone v. Ritter. 33 There the court explained that oversight liability, which rests on a failure to act in good faith, 34 was a violation of the fundamental duty of loyalty. 35 Thus, the court said, good faith is within the duty of loyalty. 36 Stone also rejected Cede II s triadic formulation of fiduciary duties, explaining that 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 Caremark, 698 A.2d at In Guttman v. Huang, the court said that the Caremark opinion articulates a standard for liability for failures of oversight that requires a showing that the directors breached their duty of loyalty by failing to attend to their duties in good faith. 823 A.2d 492, 506 (Del. Ch. 2003) (footnote omitted). Put otherwise, the decision premises liability on a showing that the directors were conscious of the fact that they were not doing their jobs. Id A.2d 693 (Del. Ch. 2005). 31 Id. at Id. (emphasis added) A.2d 362, (Del. 2006). Stone was a derivative action in which plaintiffs sought to hold the corporation s directors liable for criminal fines and penalties paid by the corporation for its violations of federal banking laws. Id. at The plaintiffs alleged these violations of law were the result of the directors failure to implement an effective monitoring system. Id. at 364. The corporation s certificate contained an exculpation provision shielding the directors from personal liability for breach of the duty of care. Id. at Id. at Id. at Id. 37 Id.

8 1068 UTAH LAW REVIEW [NO. 3 IV. DIRECTORS DUTIES AND GOOD FAITH A duty is a legal obligation that is owed or due to another and that needs to be satisfied. 38 A duty defines conduct. An affirmative duty imposes an obligation on the director to do something, and a negative duty imposes an obligation on the director to refrain from doing something. 39 Directors of Delaware corporations have two layers of duties. The first is imposed by statute and the second is imposed by principles of equity. A. The Statutory Duties of Directors The Delaware General Corporation Law requires the board of directors to manage the business and affairs of its corporation. 40 These management duties are divided into two broad areas: decision making and supervision. 41 The board s decision-making function imposes on the board the duty to decide how the company will run its business. The board makes the big decisions that chart the corporation s future. 42 The board s supervisory function imposes on the board the duty to monitor the performance of the corporation s officers and employees and to make sure they comply with the law BLACK S LAW DICTIONARY 543 (8th ed. 2004); see also Nowicki, supra note 5, at 510 (discussing the concept of duty). 39 For example, the duty of loyalty imposes an affirmative obligation that requires directors to protect the interests of the corporation committed to his charge, and at the same time it imposes a negative obligation that requires the director to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. Super. 1939). 40 DEL. CODE ANN. tit. 8, 141 (2001). Delaware Code provides, in pertinent part: The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. Id.; see, e.g., Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984); In re Transkaryotic Therapies, Inc., 954 A.2d 346, 363 (Del. Ch. 2008); Orman v. Cullman, 794 A.2d 5, 19 (Del. Ch. 2002). 41 See In re Caremark Int l, 698 A.2d 959, (Del. Ch. 1996). 42 Legally, the board itself... [is] required to authorize the most significant corporate acts or transactions: mergers, changes in capital structure, fundamental changes in business, appointment and compensation of the CEO, etc. Id. at See id.

9 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1069 B. The Fiduciary Duties of Directors The second layer of duties consists of fiduciary duties imposed on the directors by traditional principles of equity. This layer requires the board to perform its statutory duties in a way that is consistent with the directors fiduciary duties of loyalty and care. 44 The duty of loyalty defines what directors are to seek to accomplish while performing their statutory duties. The duty of care defines how directors are to pursue that goal. The duty of loyalty requires directors decision making to be motivated by an intention to serve the best interests of the corporation and its stockholders. 45 The duty of care requires directors to make decisions in an informed and deliberate manner, 46 and to use reasonable prudence in performing their monitoring function. 47 C. Good Faith and the Duty of Loyalty Good faith, unlike the duties of loyalty and care, defines neither the goal toward which directors actions should be aimed nor the way directors are to pursue that goal. The duties of loyalty and care define conduct. Directors can be told to be loyal, and they can be told to be careful, but they cannot be told to be good faith. The reason is this: unlike the duties of loyalty and care, good faith does not define conduct. Rather, it defines the state of mind. Good faith is [a] state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage, and is alternatively termed bona fides. 48 Generally, it is an honest, faithful, sincere, and reasonable belief one is doing the right thing. 49 In the context of directors decision-making function, the duty of loyalty requires that a board decision be intended to serve the best interests of the corporation and the stockholders. 50 But in deciding what course of action is most 44 See Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 179 (Del. 1986). The Delaware General Corporation Law does not define directors duties to the corporation or its shareholders. Rather, it leaves these duties to be defined under traditional principles of equity by the judges of the Delaware Supreme Court and the Delaware Court of Chancery. 45 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993); Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985). 46 Van Gorkom, 488 A.2d at Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006); Caremark, 698 A.2d at BLACK S LAW DICTIONARY 713 (8th ed. 2004); see also Nowicki, supra note 5, at 481 (quoting BLACK S LAW DICTIONARY). 49 See Nowicki, supra note 5, at When the context of the transaction requires directors to focus on the welfare of the corporation, they must decide what course of action will serve the corporation s best interests. When the context of the transaction requires them to focus on the welfare of the

10 1070 UTAH LAW REVIEW [NO. 3 likely to serve the best interests of the corporation, directors must make assessments about the future. Directors can never be certain their decision will work out as planned. Because directors are not expected to know with certainty what will happen in the future, the law allows directors to base their decisions on their good-faith beliefs about how things are likely to turn out in the future. The duty of loyalty, then, demands that directors decisions be based on a good-faith belief that the chosen course of action is the best one for the corporation. Thus, good faith is the state of mind characteristic of directorial decision making that complies with the duty of loyalty. 51 The directors belief that a decision will benefit the corporation is developed by gathering information relevant to the decision at hand. This process implicates the duty of care. Care and loyalty relate to one another as do means and ends. Loyalty defines the end to be served by the decision the best interests of the corporation or its stockholders. Care is the means by which the decision is made. Good faith is the state of mind, the belief, that animates the decision. It could be argued that a director who failed to exercise reasonable care in forming her decision lacked the informational foundation required to entertain a reasonable belief regarding the company s best interests. But this would transform every breach of the duty of care into a breach of the duty of loyalty. That would be inconsistent with 102(b)(7), which allows a corporation to protect directors from liability for breach of the duty of care, but not a breach of the duty of loyalty. 52 The better approach is to focus on the belief of the director at the time of the decision making. A negligent director can still hold an honest belief that the decision is in the best interests of the company. Moreover, a decision-making process found to be deficient by a court in hindsight may have been followed by directors who believed, in good faith, that they were doing the right thing. And even a director who is subsequently found to be negligent may have reached the challenged decision with a good-faith belief that it would serve the best interests of the corporation. 53 stockholders, they must decide what course of action will serve the stockholders best interests. See Clark W. Furlow, Reflections on the Revlon Doctrine, 11 U. PA. J. BUS. L. 519, 539 (2009). 51 In Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003), the court stated: A director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation s best interest. See also Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (defining good faith as loyalty); In re Gaylord Container Corp. S holders Litig., 753 A.2d 462, 475 (Del. Ch. 2000) (connecting goodfaith belief to the duty of loyalty). 52 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, (Del. 2009). 53 In Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985), the court observed that the directors had acted in good faith, even though their decision-making process was deemed to be grossly negligent.

11 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1071 V. THE JURISPRUDENCE OF BAD FAITH Delaware courts have concluded that at least in the corporate fiduciary context, it is probably easier to define bad faith rather than good faith. 54 But the effort to define good faith as the absence of bad faith tends to narrow the scope of good faith to the absence of particular categories of extremely bad conduct deemed to be in bad faith. 55 This approach tends to deemphasize directors affirmative duty to base their decisions and actions on the best interests of the corporation and the stockholders. 56 Good faith requires more than simply avoiding bad conduct. However, the Delaware Supreme Court has recently defined bad faith in a way that avoids this problem. It has identified four categories of conduct that constitute bad faith: (A) conduct motivated by a purpose other than the best interests of the corporation, 57 (B) conduct motivated by subjective bad faith, 58 (C) conduct that involves an intentional violation of law, 59 and (D) dereliction of duty. 60 Each will be discussed in the following sections. A. Decisions Motivated by an Improper Purpose The first category refers to conduct motivated by a purpose other than the best interests of the corporation. The breadth of this category prevents Delaware s definition of bad faith from unduly narrowing the meaning of good faith. The phrase conduct motivated by a purpose other than the best interests of the corporation defines the universe of conduct that would violate the duty of loyalty. The court s use of the word motivation implicitly recognizes the connection between a good-faith belief and the duty of loyalty. The duty of loyalty requires that directors actions be motivated by a good-faith belief that their actions will serve the best interests of the corporation. 61 Actions motivated by any purpose other than serving the best interests of the corporation would, therefore, be a violation of the duty of loyalty. In effect, Delaware s definition of bad faith reverses the relationship between good faith and bad faith. Delaware does not define good faith as the absence of a narrowly defined set of circumstances that demonstrate bad faith. Rather, Delaware defines bad faith as any conduct not motivated by a good-faith belief that the conduct will serve the best interests of the corporation. In other words, bad faith 54 Disney IV, 907 A.2d 693, 753 (Del. Ch. 2005); see also Disney V, 906 A.2d 27, (Del. 2006) (holding that bad faith was a violation of the duty of good faith). 55 See Nowicki, supra note 5, at (discussing directors good faith). 56 Id. 57 See Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006); Disney V, 906 A.2d at See Disney V, 906 A.2d at See Stone, 911 A.2d at 369; Disney V, 906 A.2d at See Stone, 911 A.2d at 369 (citing Disney V, 906 A.2d at 67). 61 Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).

12 1072 UTAH LAW REVIEW [NO. 3 refers to any conduct that violates the duty of loyalty. 62 Thus, in Delaware, the phrase bad faith is simply a shorthand way of referring to the absence of good faith, a circumstance that necessarily violates the duty of loyalty. 63 The remaining three categories of bad faith intent to harm the corporation, violation of law, and dereliction are merely particular examples of conduct contrary to the best interest of the corporation, which therefore violates the duty of loyalty. 64 The jurisprudence in this area adds detail to the understanding of good faith. B. Decisions Motivated by Subjective Bad Faith In Disney V, the court said that bad faith included subjective bad faith, which it defined as fiduciary conduct motivated by an actual intention to do harm to the company or its stockholders. 65 The court said the proposition that such conduct constitutes a violation of fiduciary duty is so obvious that it requires no further explanation. 66 But the apparent simplicity of this proposition conceals the more important point that such a motivation would also make the decision a violation of the duty of loyalty. As discussed above, the duty of loyalty requires directors to base each of their decisions on a good-faith belief that the decision will serve the corporation s best interest. A decision intended to harm the corporation can hardly be described as being motivated by such a belief. Accordingly, a decision motivated by intent to harm the corporation is a violation of the duty of loyalty. 67 C. Intentional Violation of Law In Disney V, the court also stated that a decision to intentionally violate the law reflects bad faith. 68 Again, this does little to advance the analysis. Some argue that the corporation s best interests should be defined in terms of a single- 62 See Stone, 911 A.2d at Id. 64 Conduct that is intended to harm the corporation is clearly not consistent with good faith. The intentional violation of law and dereliction of duty are also examples of conduct that will harm the corporation and, thus, are contrary to the duty of loyalty. 65 The court stated, The first category involves so-called subjective bad faith, that is, fiduciary conduct motivated by an actual intent to do harm. That such conduct constitutes classic, quintessential bad faith is a proposition so well accepted in the liturgy of fiduciary law that it borders on axiomatic. Disney V, 906 A.2d at Id. 67 See Nagy v. Bistricer, 770 A.2d 43, 49 n.2 (Del. Ch. 2000) ( By definition, a director cannot simultaneously act in bad faith and loyally towards the corporation and its stockholders. ); see also In re ML/EQ Real Estate P ship Litig., No , 1999 WL , at *4 n.20 (Del. Ch. Dec. 21, 1999). In Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003), the court observed there is no case in which a director can act in subjective bad faith towards the corporation and act loyally A.2d at 67.

13 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1073 minded pursuit of profit. 69 Under this view, a board could reasonably decide to bend the rules if the potential gain that could be achieved by illegal conduct outweighed the cost of paying the fine, discounted by the probability of getting caught. 70 This calculus would justify making illegal payments to doctors in exchange for prescribing medications sold by the corporation 71 or bribing foreign officials to build the company s business in a foreign nation. 72 The problem with this calculus is that the duty of loyalty requires the board to serve the best interests of the corporation within the boundaries of the law. 73 The board should try to win the game, but it must also play by the rules. If a company sustains a loss as a result of board-authorized illegal conduct, the directors should be liable for the net loss caused by their illegal decision. Moreover, it is not necessary to define intentional violation of the law as bad faith (i.e., not in good faith ) to make sure such culpable directors are held personally liable for their illegal conduct. Section 102(b)(7) expressly excludes acts involving intentional misconduct or a knowing violation of law from the scope of exculpation Good Faith and the Duty to Monitor D. Intentional Dereliction of Duty Caremark was the first judicial effort to define good faith for purposes of determining whether a board might be protected from personal liability by a section 102(b)(7) exculpation provision in the corporation s charter. 75 The issue before the court was whether to approve a settlement of a stockholder derivative action seeking to hold the corporation s directors personally liable for criminal fines paid by the corporation to resolve an indictment in which the corporation had been charged with violating a federal law. 76 The plaintiff argued that the alleged violations of law resulted from the board s failure to actively monitor the 69 Stephen M. Bainbridge et al., The Convergence of Good Faith and Oversight, 55 UCLA L. REV. 559, (2008) (arguing that pursuit of the corporation s best interests can, in some cases, justify minor violations of law). 70 Id. 71 In In re Caremark International, Inc. v. Derivative Litigation, 698 A.2d 959, 962 (Del. Ch. 1996), the corporation was accused of violating the Anti-Referral Payments Law, which makes it illegal for a provider of medical services, like Caremark, to pay physicians for referrals. 72 Businesses organized under the laws of the United States are prohibited from engaging in the practice of bribing foreign governmental officials. 15 U.S.C. 78dd-1 78dd-3 (2006). 73 Disney V, 906 A.2d at DEL. CODE ANN. tit. 8, 102(b)(7)(ii) (2001); see also Bainbridge et al., supra note 69, at 591(referring to section 102(b)(7) s exculpation of a knowing violation of law ). 75 See 698 A.2d at Id. at

14 1074 UTAH LAW REVIEW [NO. 3 employees compliance with the law. 77 The defendants argued that they were protected from financial liability for this alleged breach of their duty of care by a 102(b)(7) exculpation provision in the corporation s charter. 78 In assessing the strength of the plaintiff s claim, the court observed that: [A] director s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards. 79 To emphasize the significance of the phrase good faith in the quoted passage, the court inserted a footnote that warned: Moreover, questions of waiver of liability under certificate provisions authorized by 8 Del. C. 102(b)(7) may also be faced. 80 Because Caremark s certificate of incorporation contained an exculpation provision, even gross negligence in the board s performance of its statutory duty to monitor would not be enough to support the imposition of personal liability. 81 But, the court explained, a sustained or systematic failure to exercise oversight would be evidence of a lack of good faith. [I]n my opinion only a sustained or systematic failure of the board to exercise oversight such as an utter failure to attempt to assure a reasonable information and reporting system exi[s]ts will establish the lack of good faith that is a necessary condition to liability. Such a test of liability lack of good faith as evidenced by sustained or systematic failure of a director to exercise reasonable oversight is quite high. But, a demanding test of liability in the oversight context is probably beneficial to corporate shareholders as a class, as it is in the board decision context, since it makes board service by qualified persons more likely, while continuing to act as a stimulus to good faith performance of duty by such directors. 82 By connecting oversight to the duty of care, Caremark appeared to suggest that egregiously reckless performance of duty would be sufficient to show that the board had not made a good-faith effort to satisfy its duty of care, and this absence of good faith would allow the imposition of financial liability on the ultra-careless directors. Some, reading Caremark through the lens of Cede II s triadic conception 77 Id. at Id. at Id. at Id. at 970 n See id. at 965, Id. at 971.

15 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1075 of fiduciary duties, 83 thought that Caremark had defined an independent fiduciary duty of good faith that would be breached by ultra-careless decision making Good Faith and Careless Decision Making The next step came when plaintiffs sought to use Caremark s theory that dereliction of duty constituted bad faith as the basis for a claim to recover damages from the directors in the context of a challenge to the directors performance of their duties in the decision-making context. Judicial review of a board s performance of its fiduciary duties in the decision-making context focuses on the directors duties of loyalty and care. 85 Under the business judgment rule, the board is presumed to have exercised due care and to have based its decision on a belief that it would serve the best interests of the corporation. 86 To successfully challenge the board s decision the plaintiff must introduce facts that call the loyalty or the diligence of a majority of the decision-making directors into question. 87 But in an action to recover financial damages and where the corporation s certificate contained an exculpation provision, even a successful challenge to the board s compliance with its duty of care would be unavailing because the directors would be shielded from personal liability. To get around the exculpation provision, plaintiffs sought to extend Caremark s abdication-of-duty theory from the oversight context to the decisionmaking context. The logic was this: Caremark held that a sustained and systematic failure to act where there is a duty to act is evidence of a lack of good faith. A sustained or systematic failure to satisfy the duty of care is, therefore, evidence that the directors lacked good faith. Thus, a sustained and systematic failure to use due care in the decision-making process would not be protected from liability by a section 102(b)(7) exculpation provision See supra notes and accompanying text. 84 This argument was advanced by the plaintiffs in the Disney litigation. See Disney V, 906 A.2d 27, (Del. 2006). 85 Furlow, supra note 50, at Id. at Id. at There is another theory that might allow plaintiffs to place a claim beyond the reach of a section 102(b)(7) exculpation provision. Section 102(b)(7)(ii) states, in pertinent part, that an exculpation provision may not shield a director from personal liability for breach of fiduciary duty involving intentional misconduct. DEL. CODE ANN. tit 8, 102(b)(7)(ii) (2001). The word misconduct is broad. A breach of fiduciary duty (including the duty of care) would fall within the meaning of misconduct. Thus, a director who decides (an intentional act) to be grossly negligent in the performance of his directorial duties would not be protected by a section 102(b)(7) provision. Stated more affirmatively, he could be held personally liable for financial damages caused by his intentional gross negligence. It might be easier to convince a court that a director s gross negligence was intentional (and not inadvertent) than to convince a court that the director completely abdicated his duty of care.

16 1076 UTAH LAW REVIEW [NO. 3 This view appeared to receive some support in Chancellor Chandler s decision in Disney III. The plaintiffs amended complaint catalogued numerous defects in the process by which the board had decided to hire Michael Ovitz to serve as Disney s president and the process by which, after fourteen months of lackluster performance, the board allowed Mr. Ovitz to resign under circumstances that entitled him to a $140 million severance package. 89 The defendants moved to dismiss on the ground that the amended complaint merely alleged that the directors decision-making process failed to satisfy their duty of care, a breach of duty from which they were protected from personal liability by an exculpation provision in the Disney certificate of incorporation. 90 The court rejected this argument, holding that the plaintiffs allegations did more than merely describe negligent or grossly negligent decision making. 91 Rather, the allegations suggested that the Disney directors failed to exercise any business judgment and failed to make any good faith attempt to fulfill their fiduciary duties to Disney and its stockholders. 92 Such allegations, said the court, support the conclusion that the defendant directors abdicated all responsibility to consider appropriately an action of material importance to the corporation. 93 This, the court added, puts directly in question whether the board s decision-making processes were employed in a good faith effort to advance corporate interests. In short, the new complaint alleges facts implying that the Disney directors failed to act in good faith and meet minimal proceduralist standards of attention. 94 The court explained: [T]he facts alleged in the new complaint suggest that the defendant directors consciously and intentionally disregarded their responsibilities, adopting a we don t care about the risks attitude concerning a material corporate decision. Knowing or deliberate indifference by a director to his or her duty to act faithfully and with appropriate care is conduct, in my opinion, that may not have been taken honestly and in good faith to advance the best interests of the company.... Viewed in this light, plaintiffs new complaint sufficiently alleges a breach of the directors obligation to act honestly and in good faith in the corporation s best interests Thus, it appeared that a conscious disregard of the duty of care in the context of decision making was an act or omission, not in good faith, from which the directors would not be protected by an exculpation provision. In other words, a 89 Disney III, 825 A.2d 275, 279 (Del. Ch. 2003). 90 Id. at Id. at Id. 93 Id. 94 Id. 95 Id. at 289.

17 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1077 willful breach of the duty of care was worse than gross negligence and would, therefore, support a claim for monetary damages against the directors. In his post-trial opinion, Disney IV, Chancellor Chandler found that, as a matter of fact, the directors had not acted in bad faith. 96 However, the decision again suggested that a conscious disregard of the duty of care would support a claim for damages against the directors: Upon long and careful consideration, I am of the opinion that the concept of intentional dereliction of duty, a conscious disregard for one s responsibilities, is an appropriate (although not the only) standard for determining whether fiduciaries have acted in good faith Dereliction of Duty Versus Gross Negligence In Disney V, the Delaware Supreme Court acknowledged that intentional dereliction of duty was a type of bad faith that should not be entitled to exculpation. 98 But, regarding an alleged dereliction of the duty of care, the court was careful to draw a distinction between gross negligence (the degree of carelessness required to establish a breach of the duty of care) and intentional dereliction of the duty of care, which would constitute bad faith. 99 The court explained that the distinction between gross negligence and bad faith was required to by section 102(b)(7), which only allows corporations to shield directors from liability for gross negligence and does not allow them to shield directors from acts or omissions not in good faith. 100 Thus, intentional dereliction of the duty of care would be treated as conduct that cannot be shielded from personal liability. 101 As a general matter, the distinction between dereliction of the duty of care and gross negligence 102 makes logical sense. There is a difference between choosing to 96 Disney IV, 907 A.2d 693, (Del. Ch. 2005). 97 Id. at Disney V, 906 A.2d 27, 66 (Del. 2006). 99 Id. at 64 (placing gross negligence in a separate category from intentional dereliction of duty). The court noted that an intentional failure to be informed because of hostility to the company would be intentional bad faith. Id. at 65 n.104. Such ignorance would be a breach of the duty of care, but the intent to harm the company would also make it bad faith. Id. at 64. What the court overlooks is that the motive also makes it a violation of the duty of loyalty. 100 DEL. CODE ANN. tit. 8, 102(b)(7)(ii) (2001). 101 Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). To establish liability for director oversight, the plaintiff must show one of two things. Either (1) that the directors utterly failed to implement any reporting or information system or controls, or (2) having implemented such a system, the directors consciously failed to monitor its operation, and they knew they were not discharging their fiduciary obligations. Id. The court explained: Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that duty in good faith. Id. 102 Gross negligence in the context of a director s fiduciary duties requires reckless indifference to or deliberate disregard of the interests of the corporation or its

18 1078 UTAH LAW REVIEW [NO. 3 exercise no care at all, and exercising so little care that the directors actions are deemed to be grossly negligent. But when a court reviews the directors compliance with their duty of care in the decision-making process, the concept of intentional dereliction of duty has little, if any, application. The idea that dereliction of duty constitutes bad faith (or an absence of good faith) was developed in cases dealing with the board s duty to monitor. 103 That duty, by definition, involves an activity which occurs over a period of time. Accordingly, it is easy to determine whether there has been a sustained and systematic failure to perform the duty to monitor. But the decision-making process is different from the monitoring process. The decision-making process occurs at a board meeting. Judicial review of a board s decision-making process necessarily focuses on the care with which the board reached the challenged decision. To make a decision, the board must hold a meeting. 104 At the meeting, there must be a sufficient number of directors to form a quorum. 105 After at least a cursory discussion of the issue at hand, the board reaches a decision. The board may have been grossly negligent, but it would not have knowingly and completely failed to undertake [its] responsibilities. 106 It would take an extreme set of facts to conclude that the directors who participated in that process had completely abdicated their duty of care. 107 One case that presented such extreme facts was Sealy Mattress Co. of New Jersey, Inc. v. Sealy, Inc. 108 However, that case did not address the issue of good faith. It was decided before bad faith had become an important issue, and it shareholders. Rabkin v. Philip A. Hunt Chem. Corp., 547 A.2d 963, 970 (Del. Ch. 1986) (citing Allaun v. Consolidated Oil Co, 147 A. 257, 261 (Del. Ch. 1929)). 103 See supra notes and accompanying text. 104 Section 141(f) permits a board to take action by unanimous written consent without a meeting. DEL. CODE ANN. tit. 8, 141(f) (2001). A director could affix her signature to a consent without having given the matter any consideration at all. Such an act would be a clear example of an intentional disregard of the duty of care. 105 Unless the corporation s certificate of incorporation or its bylaws require more than half, a majority of the total number of directors constitutes a quorum. Id. A quorum must be present for the board to transact business. Id. 106 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, (Del. 2009). 107 Id. at 243 (quoting In re Lear Corp. S holders Litig., 967 A.2d 640, (Del. Ch. 2008). In Lear, the court said: When a discrete transaction is under consideration, a board will always face the question of how much process should be devoted to that transaction given its overall importance in light of the myriad of other decisions the board must make.... Courts should therefore be extremely chary about labeling what they perceive as deficiencies in the deliberations of an independent board majority over a discrete transaction as not merely negligence or even gross negligence, but as involving bad faith. 967 A.2d at A.2d 1324 (Del. Ch. 1987).

19 2009] GOOD FAITH, FIDUCIARY DUTIES & BUSINESS JUDGMENT RULE 1079 involved an application for injunctive relief; thus, there was no need to fashion a theory to avoid the corporation s exculpation provision. 109 The Sealy case involved a cash-out merger in which Sealy s parent corporation sought to eliminate Sealy s sole minority stockholder. 110 The directors of Sealy, all of whom were employed by the parent corporation, approved the merger in a telephone meeting that lasted between fifteen and thirty minutes. 111 They reviewed no financial information before the meeting, and they had no financial information available to them at the meeting. 112 The directors claimed they were functioning not in a fiduciary capacity, but in a ministerial capacity to carry out the parent corporation s bidding. 113 The resolution by which they approved the merger had been prepared for them by the parent corporation s lawyer. 114 The merger price was set by the parent corporation, and the directors of the subsidiary made no effort to determine whether the price was within the range of fairness. 115 The court found that they were completely uninformed and made no effort to inform themselves of the material facts. 116 These days, if a plaintiff sought to recover damages from the directors based on similar facts, the court would probably find that the directors had completely disregarded their duty of care. Because the directors could not have had a goodfaith belief that the minority stockholders best interests would be well served by their complete abdication of their duty of care, their knowing dereliction of duty 117 would constitute bad faith and a breach of the duty of loyalty. But, short of such extreme and unlikely facts, it would seem that so long as the directors held a meeting and discussed even in a very superficial way the matter before them, they could not be said to have abdicated their duty of care. Their conduct would surely be grossly negligent, but they would not have intentionally disregarded their duty of care. Thus, the concept of dereliction of duty would seem to have rare application in the context of judicial review of the directors decision-making process Id. at 1326 (noting plaintiff sought injunctive relief). 110 Id. 111 Id. at Id. (noting the directors only had a copy of the resolutions). 113 Id. at Id. at Id. 116 Id. 117 In Disney III, Chancellor Chandler said dereliction of the duty of care would be established by proof that the defendant directors knew that they were making material decisions without adequate information and without adequate deliberation, and that they simply did not care if the decisions caused the corporation and its stockholders to suffer injury or loss. 825 A.2d 275, 289 (Del. Ch. 2003). 118 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, (Del. 2009); In re Lear Corp. S holders Litig., 967 A.2d 640, (Del. Ch. 2008).

20 1080 UTAH LAW REVIEW [NO. 3 E. Lyondell Chemical Co. v. Ryan The folly of attempting to shoehorn the dereliction-of-duty concept into a review of a board s decision-making process is illustrated by the Court of Chancery s decision 119 that was reversed by the Supreme Court in Lyondell Chemical Co. v. Ryan. 120 In that case, the plaintiffs, who were stockholders of Lyondell Chemical Co., sought to impose personal liability on the directors who approved the sale of the company via a cash merger. 121 The plaintiff alleged the directors failed to take appropriate steps to achieve the best available price, in violation of their Revlon duties. 122 Ten of the eleven directors/defendants were, in the court s words, well-credentialed, independent directors. 123 The price at which the challenged merger was accomplished was conceded to be within the range of fairness. 124 But the plaintiffs argued that the board did not act aggressively enough in its efforts to achieve an even higher price and it capitulated too easily to the acquirer s insistence on certain deal protective measures in the merger agreement. 125 These arguments, which focused on the process by which the board negotiated and approved the merger, challenged only the board s compliance with its duty of care, a breach of duty from which the directors were protected by a 102(b)(7) exculpation provision in the corporation s certificate. 126 Nonetheless, the court denied the defendants motion for summary judgment, concluding that the directors (1) failed to negotiate aggressively enough, (2) failed to perform a presigning market check, and (3) agreed too easily to protection measures that would hobble a post-signing market check. 127 These facts, said the Court of Chancery, were sufficient for summary judgment purposes to support the inference that 119 Ryan v. Lyondell Chem. Co., No VCN, 2008 WL (Del. Ch. July 29, 2008) A.2d 235 (Del. 2009). 121 The merger had been consummated, so equitable remedies were no longer available. An award of financial damages against the directors was the only remedy still available to plaintiffs. Ryan, 2008 WL at *1 n Id. at *2. Revlon duties, so called, are defined in Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 179 (Del. 1986). See Furlow, supra note Ryan, 2008 WL , at * Id. at *17 (noting that the deal price was fair and was in the middle of the various ranges of fairness developed by the corporation s financial advisors). 125 The merger agreement included a no shop provision that prevented Lyondell from launching an active post-signing market check. The board also acquiesced in the purchaser s demand to include a termination fee of about 3 percent if the deal did not close. Id. at *8, * Lyondell s certificate of incorporation included a section 102(b)(7) exculpation provision, so the plaintiff was forced to ground his Revlon claim on a failure to act in good faith in violation of the duty of loyalty. Id. at * Id. at *15 16.