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

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.

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

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. 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

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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.