The Fiduciary Duty of Loyalty (Litigator Series)

THIS CASEBOOK contains a selection of 113 U. S. Court of Appeals decisions that discuss and analyze issues stemming from a party's fiduciary duty of loyalty. The selection of decisions spans from 2005 to the date of publication.

The business judgment rule establishes "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." Gantler v. Stephens, 965 A.2d 695, 705 (Del. 2009) (quoting Aronson, 473 A.2d at 812). This standard is "an acknowledgement of the managerial prerogatives of Delaware directors," id. at 812, and . . . . directors ordinarily enjoy wide latitude in managing a corporation's affairs. See In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959, 967 (Del. 1996) (emphasizing that "wrong" or "stupid" board decisions generally "provide[] no ground for director liability"). Westmoreland County Employee Retirement System v. Parkinson, (7th Cir. 2013)

But there are important limits to directors' insulation from personal liability. If a director breaches the fiduciary duty of loyalty—which requires "conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence)"—the business judgment rule affords no protection. Stone v. Ritter, 911 A.2d 362, 367 (Del. 2006). The fiduciary duty of loyalty "is not limited to cases involving a financial or other cognizable fiduciary conflict of interest," but also "encompasses cases where the fiduciary fails to act in good faith." Id. at 370. 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 fiduciary obligation in good faith." Id. Or, put slightly differently, "the intentional dereliction of duty or the conscious disregard for one's responsibilities [constitutes] bad faith conduct, which results in a breach of the duty of loyalty." McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008); see also In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479, at *20 (Del. Ch. May 31, 2011) ("[A] fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law."). Westmoreland County Employee Retirement System v. Parkinson, supra.