Disney III, like McCall and Abbott, suggested that knowing and deliberate indifference to a material corporate decision or a potential risk of harm to the corporation may be sufficient to give rise to a finding of bad faith sufficient to overcome the protections of an exculpatory charter provision.
THE STRUGGLE TO DEFINE GOOD FAITH
In the aftermath of the Disney III opinion, courts struggled to distinguish the claims for failure to act in good faith that the Chancellor found viable in Disney III from dismissible and/or monetarily exculpated claims for breach of fiduciary duty. Two cases helped clarify the pleading requirements for a good faith claim, and one case simply recognized overlap between good faith and the duty of loyalty, finding a breach of the duty of loyalty “and/or” good faith.
In Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003), Vice Chancellor Strine suggested that Delaware Courts will be quite cautious in characterizing director conduct as a “good faith” violation, and indeed, that the pleading burden for establishing such a claim is formidable.
In Guttman, stockholders brought a derivative action alleging, inter alia, that the directors failed to prevent accounting irregularities that caused the company to restate its financial statements.
Defendants moved to dismiss for failure to demonstrate that demand was excused under Court of Chancery Rule 23.1, arguing that in order for demand to be excused, plaintiff was required to demonstrate that a majority of the directors faced a “substantial likelihood of liability” for breach of fiduciary duty by failing to oversee the company’s compliance with accounting and disclosure standards. 14