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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Duty of Good Faith

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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