Good faith in corporate law - an independent fiduciary duty or an element of the duty of loyalty?

Author:Adina Ponta
Position:Faculty of Law, Babe?-Bolyai University, Cluj Napoca
Pages:117-133
Good faith in corporate law an independent fiduciary duty
or an element of the duty of loyalty?
1
Ph.D. student Adina PONTA
2
Abstrac t
Taki ng the d uty of loyalty as a start ing point, whi ch we consider to be th e
directo r’s core fiduc iary duty , this p aper aims at ident ifying the contou rs of goo d fait h in
corpora te law and the interp retations of t his in stitution in corpora te go vernance. The
objectiv e of the paper is to demonstrate th e autonomy of goo d fait h, along wit h the duty of
care and the d uty of lo yalty. The paper di splays th e traditi onal le gal app roaches o f th is
instit ution, b oth in contine ntal civ il law and in co mmon la w literature a nd jurisprudenc e
and exhau stively describes the ob ligation s that compose or even define thi s con cept. Due to
its ampli tude, the duty of goo d faith enabl ed cou rts to arti culate subsid iary fiduciary d uties
that meet socia l chang es and transformation within business l aw. By means of cited ca se
law, the con clusion will show that due to the nature, con tent and effec ts of situ ations where
specific obligat ions are met, these may n ot be incorporat ed as element s of the tra ditional
duty o f care or du ty of loyalty.
Keywords: good fait h, duty o f lo yalty, dut y to duly inform, fiducia ry d uties,
agenc y, directors' liab ility.
JEL Cla ssification: K22
1. Introduction
The acknowledgement of the duty of good faith in business law is a
response of the common-law jurisprudence in the last 20 years. This development
is enshrined in that directors owe good faith to the company, in addition to the
traditional fiduciary duties, namely the duty of care and duty of loyalty. However,
this duty was not created per se by the common law jurisprudence, but it has
always existed in corporate governance regulations, in documents of incorporation
and, in the United States, in compensation clauses of directors
3
in the event of
termination of their contracts.
The duty of good faith has always been an innuendo of case law, the most
paradigmatic example being the definition of the Business judgement rule in early
1
This art icle was submitt ed to 6th Int ernational Conference “Perspectives of Business Law in t he
Third M illennium”, 25 -26 November 2016, t he Bucharest University of Economic Studies,
Bucharest, Romania.
2
Adina Ponta - Faculty of Law, Babeș-Bolyai University, Cluj-Napoca, pont a.adina@gmail.com
3
The t erm “ director” used in the pap er at hand also refers to t he members of the board of directors in
companies that adopt the dualist management syst em in continental law.
Volume 6, Issue 2, December 2016 Juridical Tribune
118
corporate governance cases in which there was no legal definition of this rule
4
.
Common law jurisprudence explicitly recognized good faith as a distinct fiduciary
duty only around the year 2006, which triggered the necessity to shape this
obligation, to clarify it from a business law point of view and to delineate it from
the other two traditional fiduciary duties.
In essence, good faith in business law can be described by two concepts,
namely by the basic concept of the institution and by the obligations which
compose and even define this concept
5
. From the perspective of a legal definition
of this fiduciary duty, the paper will reveal the reasons for which it is desirable to
view good faith as a distinctive fiduciary duty, because the duty of care and duty of
loyalty fail to cover by their meaning all types of directors’ misconduct. Good faith
is more generous concept that covers situations that exceed the scope of traditional
fiduciary duties.
Moreover, case law has shown that certain legal or conventional provisions
may exhaustively limit directors’ liability in certain situations, but these rules
would be inapplicable in cases governed by the fiduciary duty of good faith.
Finally, due to the scale and generosity of the notion of good faith, this allows
courts to articulate specific fiduciary duties that meet social changes and
transformations within business law. Due to their nature, content and effects, these
subsidiary duties cannot be incorporated as subsidiary components of the enshrined
fiduciary duties.
This paper examines the explicit recognition of good faith in business law,
a duty which is owed by directors and executive officers
6
of the company and
highlights the controversy generated by the emergence of the new independent
fiduciary duties. The objective of this paper is to identify the contours of this duty
and to demonstrate the need for enacting applicable legislation. The connection
between these matters has been ascertained since the beginning of doctrinal
4
Currently , the Business judgement rule is provided for in art. 144 ind. 1 of the Romanian Companies
Act, law no. 31/1990. The elaboration of t he duty of care and explanation of applications of the
business judgement rule are not w ithin the scope of t he p resent p aper. F or more details on the
application of the Business judgement rule, see Ponta, A. The Business Judgement Rule. Approach
and application, „Juridical T ribune – Tribuna Juridica”, vol. 5, issue 2, December 2015, p. 25 -44
and for a comparative app roach of the Business judgement rule in the Europ ean Union, see Prof.
Dr. Catană, R. N, Pont a, A., The Business Judgement Rule and its reception in European Countries,
The Macrot heme Review 4(7), Austin, Texas, 2015.
5
Eisenberg, M . A., The Duty of G ood Faith in Corporate Law, „Delaware Journal of Corporate
Law”, vol. 31, no. 1, 2005, p. 4.
6
We will use the t erm “ officer” [„funcționar”] in the Romanian version of this art icle to refer to the
concept of officer in the common law doctrine and case law. The term officer includes persons who
bear the current responsibilities of managing t he company, s uch as the CEO, the financial director,
etc., the incumbents of high management p ositions w ho were directly hired or appointed by the
board of directors, by shareholders, by other executive directors. These p ersons generally have an
apparent or real authority t o act on behalf of t he company . In the UK, officers are regarded as
„authorized p ersons to act on behalf of t he company”, whereas in the USA, officers are employees
who bear greater resp onsibilities and who app ly t he policies established by the board of directors.
See Cambridge Dictionary for Business English, Cambridge University Press, 2006 and Oxford
Dictionary of Business and Management, Oxford University Press, 2009.

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