Restoring Trust in Corporate Directors: The Disney Standard and the New Good Faith

The purpose of this Article is to explore the parameters and potential impact of the good faith standard articulated in Disney V and clarified in Stone. Part I begins with a brief review of the historical impact of the tension between entrepreneurial freedom and managerial accountability, and Part II explains why the Disney standard differs significantly from the traditional understanding of good faith as the absence of subjective bad faith. Part III points out that the court’s use of the language of bad faith to articulate the new good faith may undercut the effectiveness of the standard. It urges further clarification of the difference between the absence of good faith and the presence of bad faith to ensure that the Disney standard will not be reduced to a mere semantic variation on the traditional duty of loyalty applicable only in the presence of improper—i.e., subjectively “bad”—motivation.

Finally, Part IV examines the Disney standard’s potential to serve as a vehicle for restoring trust in corporate directors and argues that the “new” good faith has the capacity to serve this important function, but only if the courts utilize the doctrine to require corporate directors to engage actively in oversight of the business and affairs of the entities entrusted to them. In the words of Chancellor Chandler, where corporate directors consciously disregard their duties, “the law must be strong enough to intervene against abuse of trust.”