Page 1

37 of 48 DOCUMENTS

Copyright (c) 2010 University of Southern California

Southern California Law Review

September, 2010

Southern California Law Review

83 S. Cal. L. Rev. 1231

LENGTH: 39117 words

ARTICLE: HOW MANY FIDUCIARY DUTIES ARE THERE IN CORPORATE LAW?

NAME: Julian Velasco*

BIO: * Associate Professor of Law, Notre Dame Law School; B.S. 1991, Georgetown University; J.D. 1994, Columbia
University. I would like to thank Matt Barrett, Lisa Casey, Deborah DeMott, Lyman Johnson, Brett McDonnell, and
David Millon for their thoughts and comments; and Shelby Lile and Christopher Nichols for their excellent student as-
sistance.

LEXISNEXIS SUMMARY:
... Five Paradigms for the Enforcement of Fiduciary Duties Fiduciary Duty Scope Standard of Review care process
gross negligence loyalty conflicts entire fairness objectivity bias reasonableness good faith misconduct intent rationality
substance waste Of course, the specific taxonomy is not important. ... The standard of conduct for the duty of loyalty
may require that directors act only in the interests of the corporation and its shareholders, but (under the second para-
digm) the standard of review covers primarily financial conflicts that rise to the level of self-dealing. ... Strine suggests
that the provision could have been written, and should be interpreted, as follows: The certificate of incorporation may
include a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for
monetary damage for breach of fiduciary duty of care as a director, provided that such provisions shall not eliminate or
limit the liability of a director for a breach of the duty of loyalty, including but not limited to any: i) transactions from
which the director derived an unfair or improper personal profit or benefit; ii) acts or omissions not in good faith; iii)
intentional misconduct; or iv) knowing violations of law. ... If we then descend one more level of abstraction, we find
that the good faith region in turn subdivides at present into a variety of different factual circumstances and related stand-
ards of review. ... The difference is that Strine and Hill and McDonnell would apply the label "duty of loyalty" at the
second level and say that traditional loyalty and good faith are both subsets, while Eisenberg might (and I would) apply
the label "duty of loyalty" at this third level, making traditional loyalty and good faith independent of each other and on
equal footing with care. ... The problem posed by structural bias can be resolved much more easily, by recognizing that
the essence of the third level of abstraction is not the triadic formulation itself, but rather the paradigms for the enforce-
ment of fiduciary duties.

HIGHLIGHT:
ABSTRACT

Historically, there existed two main fiduciary duties in corporate law, care and loyalty, and only violations of the
duty of loyalty were likely to lead to liability. In the 1980s and 1990s, the Delaware Supreme Court breathed life into
the duty of care, created a number of intermediate standards of review, elevated the duty of good faith to equal standing
with care and loyalty, and announced a unified test for review of breaches of fiduciary duty. The law, which once
seemed so straightforward, suddenly became elaborate and complex. In 2006, in the case of Stone v. Ritter, the Dela-
 Page 2
83 S. Cal. L. Rev. 1231, *

ware Supreme Court rejected the triadic formulation and declared that good faith was a component of the duty of loy-
alty. In this and other respects, Delaware seems to be returning to a bifurcated understanding of the law of fiduciary du-
ties. I believe that this is a mistake. This area of law is inherently complex and much too important to be oversimplified.
The current academic debate on the issue focuses on whether there should be two duties or three. In this Article, I
argue that the question is misleading and irrelevant, but that if it must be asked, the best answer is that there are five
duties - one for each paradigm of enforcement. In defending this claim, I explain the true nature of fiduciary duties and
provide a robust framework for the discussion, implementation, and development of the law.

TEXT:
[*1232]
I. INTRODUCTION

Historically, the law of fiduciary duties was fairly simple, at least with respect to corporate directors. n1 There were two
main duties: the duty of [*1233] care and the duty of loyalty. Alleged breaches of the duty of care were protected by
the business judgment rule; alleged breaches of the duty of loyalty were reviewed under the entire fairness test. Only
violations of the duty of loyalty were likely to lead to liability.
The current state of the law is significantly more complex. The Delaware courts, in particular, have been busy ac-
tively rethinking the law of fiduciary duties on many different fronts. In 1985, in the landmark case Smith v. Van
Gorkom, the Delaware Supreme Court shocked the legal and business communities by holding directors liable for
breaching the duty of care even though many did not consider their conduct inappropriate. n2 At around the same time,
the court began to announce a number of intermediate standards of review for situations in which neither the business
judgment rule nor the entire fairness test seemed appropriate. n3 In 1993, in the case of Cede & Co. v. Technicolor, Inc.,
n4
the Delaware Supreme Court made two additional announcements. The first was that, rather than being bifurcated, the
law of fiduciary duties actually was divided into three branches, with good faith joining care and loyalty in a triad of
fiduciary duties. The second was that enforcement of fiduciary duties would be subject to a unified test, with both the
business judgment rule and a fairness inquiry having application in every case. n5 Subsequently, [*1234] in In re The
Walt Disney Co. Derivative Litigation, the Delaware courts began to breathe life into the duty of good faith. n6 Fiduciary
duties, which once seemed so straightforward, suddenly became elaborate and complex. n7
It is not surprising, then, to find that many scholars and jurists have been seeking to return the law of fiduciary du-
ties to greater simplicity. One manifestation of this movement is rebifurcation. In the 2006 case Stone ex rel. AmSouth
Bancorporation v. Ritter, the Delaware Supreme Court rejected the triadic formulation of fiduciary duties and declared
that the duty of good faith was actually a component of the duty of loyalty. n8 Moreover, one could argue that, over time,
the various intermediate standards of review have been watered down to the point where they provide little more scru-
tiny than the business judgment rule. n9 Delaware seems to be returning to a bifurcated understanding of the law of fidu-
ciary duties - a move which surely would be applauded by many.
I believe that rebifurcation would be a mistake. The law of fiduciary duties is inherently complex and much too
important to be oversimplified. Clarification is important, and some pruning may be necessary. Nevertheless, if fiduci-
ary duties are to serve their purpose of protecting shareholders, the law must preserve the nuance and precision that has
developed over the years.
The benefit of bifurcation is that it can distinguish situations that are likely to lead to liability from those that are
not. Although this is a valid distinction, it is not the only relevant difference among fiduciary duties. A more meaningful
distinction would focus on the standards of review that the courts employ to adjudicate allegations of breach. This
would say more about the issues involved than just the bottom line.
There are at least five different paradigms for the enforcement of [*1235] fiduciary duties. n10 The first two are
obvious, and roughly correspond to the duties of care and loyalty. The decisionmaking process is reviewed under a leni-
ent gross negligence standard, and conflicts of interest are reviewed under a demanding entire fairness standard. Be-
cause these standards of review are so divergent, it was inevitable that one or more intermediate tests would develop.
The third paradigm is the result. The Delaware courts have created a number of intermediate standards of review to deal
with structural bias in corporate transactions. These tests can be lumped together under the concept of reasonableness.
The fourth paradigm deals with intentional misconduct. This is qualitatively different from carelessness, conflict, or
bias. Misconduct is reviewed under a deferential intent standard. The fifth paradigm deals with the business decisions
 Page 3
83 S. Cal. L. Rev. 1231, *

themselves. Claims rooted in the substance of business decisions are reviewed under the most deferential standard of
all: irrationality or waste.
These five paradigms represent the irreducible minimum level of complexity necessary to capture the nuance of the
law of fiduciary duty. Thus, the law cannot be reduced adequately to two branches. A more practical solution would be
to say that there are five fiduciary duties. These duties can be organized as follows n11:
Table. Five Paradigms for the Enforcement of Fiduciary Duties

Fiduciary Duty Scope Standard of Review

care process gross negligence
loyalty conflicts entire fairness
objectivity bias reasonableness
good faith misconduct intent
rationality substance waste

Of course, the specific taxonomy is not important. As long as it is acknowledged that there are at least five different
paradigms for enforcement, it does not matter whether the law says that there are five fiduciary duties, or three, or two,
or even only one. Each statement has [*1236] some truth to it. A statement that is true in one respect, however, may
be inadequate in other respects. Thus, the question - How many fiduciary duties are there in corporate law? - is mislead-
ing and ultimately irrelevant. My claim is not that there are five fiduciary duties, but rather that, if the question must be
asked, the best answer is five. Moreover, I maintain that it is important to clarify the issue so that a simplistic structure
does not lead to the oversimplification of content.
In Part II, I detail the five paradigms for enforcement. In Part III, I evaluate the Stone decision to rebifurcate fiduci-
ary duties through the lens of academic debate. I focus primarily on the exchange between Delaware Vice Chancellor
Leo Strine and Melvin Eisenberg. n12 This debate relies heavily on semantic argumentation. After demonstrating that
semantic arguments do not support subsuming the duty of good faith within the duty of loyalty, I conclude that determi-
nations about the nature of fiduciary duties should not turn on semantics. In Part IV, I set forth a new approach for
thinking about fiduciary duties. I begin with the concept of levels of abstraction proposed by Claire Hill and Brett
McDonnell, n13 but develop the concept very differently. I argue that it is more meaningful and productive to view fidu-
ciary duties at the level of paradigms for enforcement than at the more abstract level of potential for liability. I also
demonstrate that fiduciary duties are highly interrelated, such that there is significant overlap among them. As a result,
fiduciary duties cannot be said to lie on a single linear continuum from which simple conclusions can be drawn. Finally,
I argue that the various fiduciary duties reflect different aspects of the one fundamental fiduciary duty - to pursue the
interests of the corporation and its shareholders - and that, for purposes of litigation, a fiduciary duty corresponds not to
director conduct, but to the shareholders' concerns about the conduct and the evidence they can offer. Thus, every action
taken by a [*1237] director implicates each fiduciary duty and can breach any or all of them depending on the cir-
cumstances. Throughout Part IV, I am not advocating for any change in law. Rather, I am merely seeking to develop a
better understanding of existing law. In Part V, I consider the impact of Cede & Co.'s unified test for breach of fiduciary
duty on my theory. I argue that my theory can work well within that framework, but that it would be better for Delaware
to return to a more traditional model in which the various standards of review are independent of each other. In this re-
spect, I am recommending a change in law. I conclude in Part VI.
II. THE FIVE PARADIGMS

The debate about the number of fiduciary duties in corporate law has focused on whether there should be two duties or
three. Currently, the courts seem to favor bifurcation over a triadic formulation. Thus, a claim that there may be five
fiduciary duties would seem to be highly problematic. I will begin laying the groundwork for the argument with a claim
that should be much less controversial. In this part, I will demonstrate that there are at least five paradigms for the en-
forcement of fiduciary duties. A paradigm for enforcement is somewhat different from a standard of review. It is an ap-
proach to judicial review and may comprise a number of related tests. There are more than five standards of review in
corporate law. Thus, it is possible to argue that there are more than five paradigms for enforcement. I believe, however,
that five represents the irreducible minimum, and that it adequately reflects the richness and nuance of existing law.
Sections A and B cover the two most familiar paradigms. The first is the paradigm for review of the decisionmak-
ing process, or the business judgment rule. The second is the paradigm for review of conflicts of interest, or the entire
fairness test. Section C covers the third paradigm. Issues of structural bias invoke a number of intermediate standards of
 Page 4
83 S. Cal. L. Rev. 1231, *

review that attempt to assess reasonableness. Section D covers the fourth paradigm. The emerging duty of good faith
employs an intentional misconduct standard. Section E covers the fifth and final paradigm. The substance of business
decisions is reviewed under a waste standard. Finally, Section F closes with a short discussion of the implications of
exculpation charter provisions to the discussion.
A. Process (Gross Negligence)

The first paradigm covers what is normally meant by the duty of care: [*1238] the decisionmaking process. n14 Under
the duty of care, "directors of a corporation in managing the corporate affairs are bound to use that amount of care
which ordinarily careful and prudent men would use in similar circumstances." n15 More specifically, "directors have a
duty to inform themselves, prior to making a business decision, of all material information reasonably available to them.
Having become so informed, they must then act with requisite care in the discharge of their duties." n16
While this language adequately describes the duty of care, it does a poor job of describing the first paradigm of en-
forcement. In order to understand the enforcement of the duty of care, one must understand the business judgment rule.
The most common definition of the business judgment rule is that it "is a presumption that in making a business deci-
sion 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." n17 The Delaware courts have explained:

The rule operates as both a procedural guide for litigants and a substantive rule of law. As a rule of evidence, it creates a
presumption ... . If the proponent [of a claim] fails to meet her burden of establishing facts rebutting the presumption,
the business judgment rule, as a substantive rule of law, will attach to protect the directors and the decisions they make.
n18

This characterization of the business judgment rule is inadequate and does more to confuse matters than to clarify
them. In simpler terms, the business judgment rule can be characterized as a standard of review that corresponds to the
duty of care. n19 Confusingly, standards of review do not always match standards of conduct in corporate law. n20 In Dela-
ware, "under [*1239] the business judgment rule director liability is predicated upon concepts of gross negligence."
n21
Thus, while the duty of care demands that directors avoid negligence, the business judgment rule provides that direc-
tors will be held accountable for breaching the duty of care only if they are grossly negligent. Although the distinction
between negligence and gross negligence may be difficult to articulate, n22 gross negligence involves conduct that is sig-
nificantly more culpable than negligence; conduct that can be characterized as extremely negligent, as opposed to barely
negligent. n23
Thus, the first paradigm for the enforcement of fiduciary duties is that the directors' decisionmaking process will be
reviewed for gross negligence. This is a deferential standard of review. The justification for the laxity is multifaceted. n24
It usually begins with the statutory mandate that "the business and affairs of every corporation ... shall be managed by or
under the direction of a board of directors," n25 rather than by the shareholders who would challenge their decisions or
the courts who would evaluate them. n26 It is also heavily grounded in the recognition that courts lack the expertise to
evaluate business decisions, given the infrequency with which they are required to do so and the inherent bias of hind-
sight. n27 Ultimately, however, it is based largely on the insight that, "as a general matter, directors can be trusted and
need not be policed very closely," n28 at least unless there is some reason to doubt them.
B. Conflicts (Fairness)

The second paradigm covers what is traditionally meant by the duty of [*1240] loyalty: conflicts of interest. "If the
key insight of the business judgment rule is that directors generally can be trusted, the key insight of the entire fairness
test is that this is not always so." n29 Guth v. Loft, Inc. is often cited as providing the classic statement of the duty of loy-
alty:

Corporate officers and directors are not permitted to use their position of trust and confidence to further their private
interests. While technically not trustees, they stand in a fiduciary relation to the corporation and its stockholders. A pub-
lic policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has
 Page 5
83 S. Cal. L. Rev. 1231, *

established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous ob-
servance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also
to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which
his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers.
The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict be-
tween duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and
varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale. n30

Once again, this is more a description of the duty of loyalty than of the second paradigm of enforcement. In order to
understand the enforcement of the duty of loyalty, one must understand the entire fairness test. At first glance, the stand-
ard of review and the standard of conduct associated with the duty of loyalty seem closely aligned. n31 Closer inspection,
however, reveals that there is a significant divergence in some respects.
Taken to its logical conclusion, the duty of loyalty could require that directors never have any conflicts of interest.
Essentially, that was once the state of the law. n32 Over time, however, the law developed to the point where it stands
today: directors are allowed to engage in interested transactions, provided that the transactions are sanitized by the ap-
proval of either fully informed directors or shareholders ex ante, or the courts ex [*1241] post. n33 If a transaction is
sanitized by director or shareholder approval, it usually is found not to involve a conflict of interest and is reviewed un-
der the business judgment rule; otherwise, it is subject to scrutiny under the entire fairness test. n34
The entire fairness test has both a procedural and a substantive component. According to the Delaware Supreme
Court:

The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the
transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of
the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial con-
siderations of the proposed [transaction], including all relevant factors: assets, market value, earnings, future prospects,
and any other elements that affect the intrinsic or inherent value of a company's stock... . However, the test for fairness
is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the
question is one of entire fairness. n35

The deference that is the hallmark of the business judgment rule is entirely absent under the entire fairness test. Not
only do directors bear the burden of proof, but they also must justify both their decisionmaking process and the sub-
stance of their decisions. It would seem that the business judgment rule and the entire fairness test could not be much
more [*1242] divergent. In fact, it has been said that "the determination of the appropriate standard of judicial review
frequently is determinative of the outcome." n36
And yet, the entire fairness test is not quite as demanding as could be imagined. It is not actually outcome-determi-
native. n37 Nor does the test require the directors to prove that their decision was perfect. n38 Moreover, the test has only
limited applicability. Despite the broad language with which the courts often describe the duty of loyalty, the entire fair-
ness test is not applied to all director conflicts. It is only applied to those that "rise to the level of self-dealing." n39 "Clas-
sic examples of [self-dealing] involve either a director appearing on both sides of a transaction or a director receiving a
personal benefit from a transaction not received by the shareholders generally." n40
Actual self-dealing is not necessarily required, provided that the conflict rises to the same level substantively. How-
ever, many types of conflict that a layperson might think would compromise a director's objectivity are not deemed to
rise to the level of self-dealing. The most obvious is friendship and collegiality among the directors on a board. n41 The
courts have rejected such claims even in extreme circumstances. n42 [*1243] Generally, to be cognizable, a conflict
must consist of either a personal or familial financial interest. Even so, not all financial conflicts will be sufficient to
invoke the entire fairness test. The conflict must be "material." n43 A hypothetical or speculative conflict is insufficient.
Even a director's interest in maintaining his position on the board in the face of a hostile takeover may not be sufficient.
n44

A comparison of the standard of conduct and the standard of review for the duty of loyalty reveals that there is sig-
nificant congruence as well as significant divergence. The standard of conduct is uniformly demanding; the standard of
review is not. On the one hand, the standard of review is significantly more limited than the standard of conduct in that
 Page 6
83 S. Cal. L. Rev. 1231, *

it focuses primarily, if not exclusively, on financial conflicts that rise to the level of self-dealing. n45 On the other hand,
once this hurdle is cleared, the standard of review is quite exacting in that it requires the directors to carry the burden of
proof on the issue of fairness. In other words, the shareholders do not have to prove any actual wrongdoing, but only a
cognizable conflict of interest, and then the directors must prove that they have done nothing wrong. n46
[*1244] Thus, the second paradigm for the enforcement of fiduciary duties is that directors are required to defend
their actions whenever there is a conflict that rises to the level of self-dealing. This is a demanding standard of review
that is reserved for special circumstances. The justification is that when directors are conflicted they cannot be trusted to
pursue the interests of the shareholders over their own. n47 The problem is that, even assuming that the directors would
not be dishonest by consciously favoring their own interests, there may be situations when they are unable to pursue
shareholder interests as zealously as the shareholders deserve. For this reason the courts provide shareholders with an
impartial review. n48
C. Bias (Reasonableness)

The third paradigm comprises a number of different standards of review that deal with essentially the same problem:
structural bias.

The term "structural bias" generally refers to the prejudice that members of the board of directors may have in favor of
one another and of management. It is said to be the result of the "common cultural bond" and "natural empathy and col-
legiality" shared by most directors, the "economic[] or psychological[] dependency upon or ties to the corporation's ex-
ecutives, particularly its chief executive," and the "process of director selection and socialization, which incumbent
management dominates." n49

[*1245] Structural bias is a form of conflict, but not one that courts deem cognizable under the duty of loyalty. n50
This is understandable: "If structural bias were accepted as a conflict of interest, ... many issues that are deemed to in-
volve the duty of care might be considered to involve the duty of loyalty. If so, the entire fairness test would swamp the
business judgment rule." n51 This would be inappropriate. Nevertheless, the concern that structural bias affects the inde-
pendence of directors is legitimate and, as a result, "the deference of the business judgment rule seems as inadequate as
the rigor of the entire fairness test seems excessive." n52
Despite sometimes being resistant to, or even dismissive of, claims of structural bias, n53 the Delaware courts have
dealt with the problem in a number of different circumstances. n54 They have done so by developing intermediate stand-
ards of review when neither the business judgment rule nor the entire fairness test seemed appropriate. The two most
significant circumstances the courts have addressed are takeover defense and board review of shareholder derivative
litigation. n55
[*1246] In Unocal Corp. v. Mesa Petroleum Co., the court recognized that, in circumstances involving a hostile
takeover, there is an "omnipresent specter that a board may be acting primarily in its own interests, rather than those of
the corporation and its shareholders." n56 In response, the court recognized "an enhanced duty which calls for judicial
examination at the threshold before the protections of the business judgment rule may be conferred." n57 That threshold
inquiry was a new intermediate standard of review. First, "directors must show that they had reasonable grounds for
believing that a danger to corporate policy and effectiveness existed." n58 Second, the defensive measures "must be rea-
sonable in relation to the threat posed." n59 At the time, this seemed to be a reasonable attempt to balance the various
competing concerns. Unfortunately, subsequent developments have demonstrated that the Unocal test is not as demand-
ing as its language might suggest, and I have argued elsewhere that it now provides little more protection than the busi-
ness judgment rule. n60
In Zapata Corp. v. Maldonado, the court recognized that, in situations where a board of directors decides to oppose
derivative litigation, "there is sufficient risk in the realities of [the] situation ... to justify caution beyond the adherence
to the theory of business judgment." n61 In response, the Delaware Supreme Court reserved the right to reject a board or
committee's decision if the circumstances warrant. n62 Again, the court did so in the form of a new, two-part test. "First,
the Court should inquire into the independence and good faith of the committee and the bases supporting its conclu-
sions... . The corporation should have the burden of [*1247] proof ... ." n63 Second, "The Court should determine, ap-
plying its own independent business judgment, whether the motion should be granted." n64 This result is somewhat out of
place in corporate law, where judicial incompetence to make business decisions is one of the key justifications of the
 Page 7
83 S. Cal. L. Rev. 1231, *

business judgment rule. n65 Nevertheless, this reserved power to overrule directors' decisions based entirely on the courts'
own assessment of the merits has not had much of an impact on litigation. n66
These are the two main intermediate standards of review. Others could be identified. n67 Unfortunately, Delaware
has dealt with these problems in an ad hoc manner. In earlier work, I have argued that a common approach to the prob-
lem of structural bias would be preferable. n68 My proposal called for a moderate review of the substance of directors'
decisions: in cases involving structural bias, the shareholders would be able to prevail by establishing that the directors'
decisions were unreasonable. n69 This reasonableness standard may seem reminiscent of the Unocal standard, but actu-
ally is quite different:

Aware of structural bias, the courts should not be overly concerned with substituting their own business judgment for
that of conflicted directors. They should, with confidence, determine whether the decision in question was unreasonable
under the circumstances. The only deference [*1248] that courts should show would come from the breadth of the
term "reasonable" - which is significant, but not boundless. The extreme deference that would normally be afforded to
directors under the business judgment rule should not apply. n70

As I have argued, such a standard would "strike a balance between the deference of the business judgment rule and the
rigor of the entire fairness test" n71 by providing judicial review that is "meaningful, but not excessive." n72
Clearly, the third paradigm of enforcement of fiduciary duties is less well defined than the first two. Nevertheless, a
general outline is discernable. Under the Unocal test, a court reviews the merits of the board's decisions for reasonable-
ness and proportionality (even if the review is deferential). Under the Zapata test, a court may reject the board's decision
based entirely on its own business judgment. In other words, the third paradigm provides that, in a situation involving a
recognized risk of structural bias, the courts will apply an intermediate standard of review in which the substance of the
directors' decision is not beyond scrutiny. n73
In this Article, I refer to the third paradigm as a test of "reasonableness" for three reasons. First, although there is no
single intermediate standard of review, it is grammatically easier to speak as if there were. Second, the term reasonable-
ness conveys a moderate review of substance, which the various standards share. Third, the term reasonableness can
easily refer to either the Unocal test or my proposed intermediate standard of review. In any event, the approach to fidu-
ciary duties that I propose in this Article works well regardless of the precise contours of the third paradigm.
D. Misconduct (Intent)

The fourth paradigm covers what is normally meant by the duty of good faith: intentional misconduct. n74 The law not
only presumes, but also requires, that directors act in good faith. n75 Various statutory provisions [*1249] reflect the
importance of good faith in corporation law. n76 For over a decade, the duty of good faith was elevated to a position of
equality with duties of care and loyalty in Delaware law. n77 Nevertheless, the duty of good faith has not received much
attention until fairly recently.
While it is difficult to pin down the duty of good faith with certainty, Eisenberg has articulated an excellent formu-
lation:

The duty of good faith in corporate law is comprised of a general baseline conception and specific obligations that in-
stantiate that conception. The baseline conception consists of four elements: subjective honesty, or sincerity; nonviola-
tion of generally accepted standards of decency applicable to the conduct of business; nonviolation of generally ac-
cepted basic corporate norms; and fidelity to office. Among the specific obligations that instantiate the baseline concep-
tion are the obligation not to knowingly cause the corporation to disobey the law and the obligation of candor even in
non-self-interested contexts. n78

Although one may quibble at the margins, this description captures the essence of the duty of good faith.
One of the leading cases on the issue of good faith is the Disney case. n79 There, the Delaware Supreme Court elabo-
rated on the duty of good faith as follows:
 Page 8
83 S. Cal. L. Rev. 1231, *

A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other
than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable
positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a con-
scious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are
the most salient. n80

This account comes closer to describing the standard of review than the standard of conduct. It is much narrower than
Eisenberg's standard. Essentially, it provides that shareholders may establish a breach of the duty of good faith by show-
ing intentional misconduct, intentional violation of [*1250] law, or intentional disregard of duty.
All three of the violations of the duty of good faith identified by the Disney court, as well as dishonesty, insincerity,
indecency, and infidelity, n81 can be categorized generally as "intentional misconduct," which is the core concern of the
fourth paradigm. A breach of the duty of good faith involves conduct that is both intentional and wrongful. There need
not be any malice or intent on the part of the director to cause harm, however. As long as there is intentional behavior
that the law considers to be misconduct, there is a breach of fiduciary duty. In other words, there is an objective compo-
nent to good faith. n82 Of course, a subjective intent to harm shareholder interests would suffice; but so would a simple
intent to violate the law (even if it were motivated by a desire to benefit the shareholders) as well as intent to shirk re-
sponsibility, among other things.
I would argue that, under the fourth paradigm, the shareholders also can establish a breach of fiduciary duty by
proving that the directors intentionally violated the standard of conduct for either the duty of care or the duty of loyalty
(or any other duty, for that matter). This is important because of the divergence between standards of conduct and stand-
ards of review in corporate law. n83 The standard of conduct for the duty of loyalty may require that directors act only in
the interests of the corporation and its shareholders, but (under the second paradigm) the standard of review covers pri-
marily financial conflicts that rise to the level of self-dealing. However, if the shareholders can establish that the direc-
tors actually pursued an interest other than those of the corporation and its shareholders (whatever that may be, and
whether or not the conflict is financial or rises to the level of self-dealing), that would be actionable under the fourth
paradigm. Likewise, the standard of conduct for the duty of care requires that each director act as an ordinarily careful
and prudent person in similar circumstances, but the standard of review requires the shareholders to prove that the direc-
tors were grossly negligent - and even then, the directors might be exculpated. n84 However, if the shareholders could
establish that directors acted recklessly - that is, with a "conscious ([or] [*1251] deliberate) disregard for or indiffer-
ence to ["a substantial and unjustifiable'] risk" n85 - that would be actionable under the fourth paradigm. n86
What happens if the shareholders can establish intentional misconduct? Presumably, an entire fairness inquiry
would follow, n87 although that is not entirely free from doubt. n88 I propose that the burden should shift to the directors to
establish a compelling justification for their actions. Readers familiar with Blasius Industries, Inc. v. Atlas Corp. will no
doubt notice a resemblance with the test announced in that case. n89 This is intentional. I believe that the Blasius case, at
root, involves the duty of good faith rather than care or loyalty. n90
In Blasius, a 9 percent shareholder sought to expand the board of directors of the company from seven to fifteen
members and to name eight new directors. In response, the existing directors quickly expanded the size of the board to
nine members and appointed two new directors. This was done in order to prevent that shareholder from naming a ma-
jority of directors. n91 The court held that whenever directors act for the primary purpose of thwarting a shareholder vote,
their actions cannot be upheld without a compelling justification. n92 This is because such action by the board of directors
intrudes on the shareholders' right in corporate governance to elect directors. n93
The directors' actions in Blasius constituted intentional misconduct. The conduct (appointing new directors) was
both intentional (primary purpose) and wrongful (thwarting a shareholder vote). n94 The court believed [*1252] that
the directors were acting in subjective good faith (that is, in order to protect the remaining shareholders). n95 Neverthe-
less, the conduct was inherently wrongful under corporate law given the structure of corporate governance. Rather than
rule their behavior illegal per se, however, the court gave the directors the opportunity to prove that they were acting in
the best interests of the corporation and its shareholders by establishing a compelling justification for their actions. This
is no intermediate standard of review. Unlike the third paradigm, shareholders bear a very heavy burden. Moreover, if
they meet this burden, the directors bear an even heavier burden to escape liability. This, I believe, is the essence of the
fourth paradigm for enforcement - or at least should be.
 Page 9
83 S. Cal. L. Rev. 1231, *

Thus, the fourth paradigm for the enforcement of fiduciary duties is that the directors will be held accountable for
intentional misconduct. It is important to note that the primary burden of proof is on the shareholders, and it is a heavy
one. Although malice is not necessary, the shareholders must establish intentional conduct that is wrongful. Once they
have done so, the burden shifts to the directors to justify their actions. Because their actions constitute misconduct, the
directors should have to establish a compelling justification. n96
As a final matter, it is worth noting how different the fourth paradigm is from the second. The second paradigm is
based on the duty of loyalty and focuses on financial conflicts that rise to the level of self-dealing. Under it, the real bur-
den is on the directors to establish that their behavior was entirely fair to the shareholders. The fourth paradigm is based
on the duty of good faith and focuses on intentional misconduct. Under it, the shareholders bear the primary burden of
establishing that the directors engaged in intentional misconduct. As standards of review, the two are entirely different.
E. Substance (Waste)

The fifth and final paradigm deals with the substance of business decisions and covers a range of legal concepts, in-
cluding abuse of [*1253] discretion, waste, irrationality, and (more recently) substantive care. n97 This paradigm is the
most controversial.
One of the most respected jurists in Delaware's history, Chancellor William Allen, took a very strong negative posi-
tion on the issue in In re Caremark International, Inc. Derivative Litigation. n98 According to him,

Compliance with a director's duty of care can never appropriately be judicially determined by reference to the content of
the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process
employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong,
or degrees of wrong extending through "stupid" to "egregious" or "irrational", provides no ground for director liability,
so long as the court determines that the process employed was either rational or employed in a good faith effort to ad-
vance corporate interests. n99

This position is understandable. The rationale for limited judicial review under the business judgment rule applies with
even greater force to the substance of business decisions than to the decisionmaking process. n100 Many scholars believe
that the courts should not review the substance of business decisions absent some other breach of fiduciary duty. n101
Nevertheless, the fact remains that courts generally do reserve the right to review the substance of business deci-
sions, at least in the most extreme cases. n102 For example, in Brehm v. Eisner, the Delaware Supreme Court took a very
negative position on the issue, but did not reject it altogether:

As for the plaintiffs' contention that the directors failed to exercise "substantive due care," we should note that such a
concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify [*1254] directors' judg-
ments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process
due care only. Irrationality is the outer limit of the business judgment rule. Irrationality may be the functional equivalent
of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the busi-
ness judgment rule. n103

It seems that the courts are unable or unwilling to let go of the concept. n104 This should not provide much comfort to
shareholders, however. To establish a breach of fiduciary duty under the fifth paradigm, the shareholders bear the bur-
den of establishing that "[the consideration] the corporation has received is so inadequate in value that no person of or-
dinary, sound business judgment would deem it worth that which the corporation has paid." n105 "That is "an extreme
test, very rarely satisfied by a shareholder plaintiff.'" n106
In light of the foregoing, one has to wonder whether there is any point in having a fifth paradigm. Perhaps it is
nothing more than a "theoretical exception." n107 After all, it seems fanciful to suggest that a careful, unconflicted, and
unbiased board of directors acting in good faith could come to a decision that no reasonable person could reach.
The fifth paradigm is not merely tilting at windmills, however. It does [*1255] not assume that directors who
have fulfilled fiduciary duties make utterly irrational decisions. Rather, it assumes only that a director who cannot be
 Page 10
83 S. Cal. L. Rev. 1231, *

proven to have breached any other fiduciary duty nevertheless can make a decision that appears irrational. However, a
decision that would seem irrational from the perspective of a faithful director could be perfectly rational from the per-
spective of an unfaithful director. Because of the divergence of standards of conduct and standards of review, n108 direc-
tors may breach a fiduciary duty without being held accountable. The fact that a shareholder cannot establish gross neg-
ligence does not mean that directors were not negligent; the fact that a shareholder cannot establish self-dealing does not
mean that directors were not conflicted; the fact that a shareholder cannot establish that a decision was unreasonable
does not mean that directors were unbiased; and the fact that a shareholder cannot establish intentional misconduct does
not mean that directors were acting in good faith. Thus, the basis for the directors' decision could be misbehavior that
otherwise would go unchecked.
In other words, the waste doctrine can be seen as a proxy for breach of other fiduciary duties, especially the duty of
good faith. n109 The real principle, then, is not that a decision was so bad that the director should be held responsible. Ra-
ther, it is that the decision was so bad that it is reasonable to infer that something is amiss.
Thus, the fifth paradigm for the enforcement of fiduciary duties is that a breach may be predicated on the substance
of a business decision, but only in extreme circumstances. The shareholders must establish that the decision has no ra-
tional business purpose n110 or amounts to a waste of [*1256] corporate assets. n111 This is an extremely heavy burden
that is rarely satisfied.
F. A Word on Exculpation

There is one important wrinkle that must be addressed at this point, if only briefly: director exculpation. The Delaware
General Corporation Law authorizes a corporate charter to eliminate the personal liability of directors for monetary
damages for breach of the fiduciary duty of care. n112 The history of such provisions is well known and need not be re-
peated here. n113 It is sufficient to note that many companies have adopted such provisions, effectively eliminating per-
sonal liability for breach of the duty of care. It is obvious that this type of provision would have a significant practical
effect on litigation.
For purposes of this Article, two observations are in order. First, although such a provision may eliminate personal
liability for breach of the duty of care, it does not eliminate the duty of care itself. Thus, injunctive relief is not pre-
cluded. n114 Second, the statutory provision is not, itself, part of the law of fiduciary duties. It merely authorizes individu-
als to contract around the duty of care if they choose. At least in Delaware, if shareholders do not consent, the duty of
care remains unchanged and liability for damages may result. n115 Thus, while the director exculpation statute may have
significant real-world consequences, it does not alter the first paradigm for enforcement of fiduciary duties. It merely
limits the remedies [*1257] that may be available in many cases.
III. ARGUING SEMANTICS

Two of the leading protagonists in the debate on the number of fiduciary duties in corporate law are Vice Chancellor
Strine and Eisenberg. Long before the Delaware Supreme Court reversed course in Stone, Strine was authoring opinions
arguing that the duty of good faith should be seen as subset of the duty of loyalty. n116 More recently, in an article coau-
thored with Lawrence A. Hammermesh, R. Franklin Balotti, and Jeffrey M. Gorris, the Vice Chancellor refined his ear-
lier arguments and his case more fully. n117 Eisenberg disagrees. In an article that predates Stone, he argues that good
faith is, and should be considered, a separate duty. n118
Semantics play a surprisingly large role in their debate. In this part, I will consider the arguments raised by Strine,
as well as some of Eisenberg's responses. Section A addresses the etymological arguments. I contend that Strine does
not prove that the terms good faith and loyalty are synonymous. Section B considers an important test of whether good
faith is a subset of loyalty: whether it is possible for one who acts in bad faith to be considered loyal. I argue that it is.
Section C addresses the role of good faith in the Delaware General Corporation Law. I argue that the evidence supports
the existence of a separate duty of good faith. Section D addresses the rest of Strine's arguments. I contend that Strine
develops a framework for conceptualizing fiduciary duties that is plausible, but he does not present compelling evidence
to support his theory. This is important because other theories are also plausible. Section E concludes that the number of
fiduciary duties cannot be determined by reference to semantic arguments.
A. Etymology
 Page 11
83 S. Cal. L. Rev. 1231, *

Strine's arguments begin with etymology. Essentially, he notes that [*1258] "loyalty, fidelity, and faithfulness are all
synonyms," n119 and that, "put together with the word "good,' the word "faith' bears an unbreakable relationship to con-
cepts of fidelity and loyalty." n120 He concludes that "it is linguistic nonsense to divorce the defining concept of good
faith from the terms - faith, fidelity, and loyalty - to which it gives effective life." n121
Eisenberg takes issue with Strine's etymology. He argues that Strine "looked up the wrong word." n122
Specifically,
Eisenberg contends that

there is a crucial difference between faith, upon whose definition the Vice Chancellor's argument rests, and good faith.
Faith, as Vice Chancellor Strine accurately reports, means allegiance. Good faith does not. The difference is severe... .
The definition of good faith includes multiple elements, and ... neither allegiance nor loyalty is one of those elements.
n123

Eisenberg then shows how dictionary definitions of the term good faith demonstrate that it is not synonymous with
loyalty. n124
Strine does not respond directly to Eisenberg's argument. He admits that "the phrase "good faith' is often broadly
defined as "honesty or lawfulness of purpose' or "compliance with standards of decency and honesty,'" n125 but he tries to
massage those definitions into conformity with his claim. Thus, he argues that the "broad usage is fully consistent with
the requirement that to be "good,' one has to be true to a certain form of "faith.'" n126 Such arguments have a ring of plau-
sibility, but are not persuasive.
Strine does offer one strong etymological argument in response to Eisenberg. As he notes, "The Oxford English
Dictionary defines good faith as "fidelity, loyalty' and directs the reader to the following definition of faith: "The quality
of fulfilling one's trust; faithfulness, fidelity, loyalty.'" n127 This argument merits more attention.
[*1259] The Oxford English Dictionary does not define the term "good faith" independently; rather, the term is
included under the main entry of the term "faith." The complete definition reads as follows:

11. good faith, bad faith: = L. bona, mala fides, in which the primary notion seems to have been the objective aspect of
confidence well or ill bestowed. The Eng. uses closely follow those of L.

a. good faith: fidelity, loyalty (= sense 10 [i.e., "The quality of fulfilling one's trust; faithfulness, fidelity, loyalty."]);
esp. honesty of intention in entering into engagements, sincerity in professions, bona fides.

... .

b. bad faith: faithlessness, treachery; intent to deceive. Punic (rarely Carthaginian) faith (= L. fides Punica): faithless-
ness. n128

A few observations are in order. First, although the definition does include reference to faithfulness and loyalty, this is
not surprising given the term's inclusion as a mere "sense" (or subentry) of faith. In other dictionaries, it appears as a
separate term. n129 Second, even in this definition, there seems to be a strong connotative tilt toward honesty and sincer-
ity. Third, the definition emphasizes the Latin origin, bona fides, which The Oxford English Dictionary itself defines
simply as "good faith, freedom from intent to deceive." n130
Moreover, other dictionaries are much less supportive of Strine's claim. As Eisenberg points out, Webster's Third
New International Dictionary, n131 the American Heritage Dictionary, n132 and the Random House Dictionary n133 all have
 Page 12
83 S. Cal. L. Rev. 1231, *

definitions that have very little to do with loyalty. Honesty, sincerity, decency, and lawfulness seem to be the core
meaning.
Legal dictionaries are generally in accord. n134 Like The Oxford English [*1260] Dictionary, Black's Law Dic-
tionary adds a slight wrinkle. It defines good faith as follows:

Good faith, n. A state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one's duty or obligation,
(3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent
to defraud or to seek unconscionable advantage. - Also termed bona fides. Cf. bad faith. n135

For the most part, this definition tracks the others. However, the second numbered clause, "faithfulness to one's duty or
obligation," seems consistent with Strine's position. Ironically, Eisenberg cites Black's Law Dictionary, while Strine
does not. n136 This is not coincidental. Rather, it reflects the fact that, on balance, the definition supports the claim that
good faith is something different from loyalty.
Thus, from a purely etymological perspective, Strine's argument is unpersuasive. Good faith is something different
from loyalty. There may be some overlap, but not enough to suggest that good faith is a subset of loyalty.
B. Loyalty Without Good Faith?

One straightforward way to determine whether good faith is a subset of loyalty is to ask whether it is possible for
someone to be loyal without acting in good faith. Both Strine and Eisenberg consider this by focusing on one specific
aspect of the duty of good faith: the duty to avoid intentional violations of law. If a director who intentionally violates
the law can be considered loyal to the corporation and its shareholders, then good faith cannot be considered merely a
subset of loyalty.
[*1261] According to Eisenberg:

A manager's obligation not to knowingly cause the corporation to violate the law has traditionally and properly been
founded on the duty of good faith. A corporate manager who knowingly causes the corporation to violate the law lacks
honesty, because he knows that he is acting improperly and is violating generally accepted standards of decency appli-
cable to the conduct of business. In addition, such a manager lacks fidelity to his office, because the organization in
which his office is embedded is obliged to act within the boundaries set by the law and can reasonably expect its manag-
ers to act accordingly. In contrast, the obligation not to knowingly cause the corporation to violate the law cannot be
founded on the duties of care and loyalty. A manager who knowingly causes the corporation to violate the law will sel-
dom violate the duty of loyalty, because typically the manager does not engage in self-interested conduct, and will sel-
dom violate the duty of care, because typically the manager rationally believes that the illegal conduct will serve the end
of profit maximization. n137

Strine disagrees. Because his definition of loyalty includes fidelity in every sense of the word, including general fidel-
ity to office, a breach of good faith is necessarily a breach of loyalty:

For a corporate director knowingly to cause the corporation to engage in unlawful acts or activities or enter an unlawful
business is disloyal in the most fundamental of senses. A publicly chartered corporation becomes a legal citizen imbued
with rights and responsibilities. When directors knowingly cause the corporation to do what it may not - engage in un-
lawful acts or unlawful businesses - they are disloyal to the corporation's essential nature. By causing the corporation to
become a lawless rogue, they make the corporation untrue to itself and to the promise underlying its own societally au-
thorized birth. No agent can act loyally toward a principal by undertaking, without authority, consciously unlawful ac-
tivity in the name of the principal. In the case of a corporation, the corporation has no power to give directors that au-
thority because the corporation's existence is premised on the nondefeasible promise that it will conduct only lawful
business through lawful activities. Law compliance thus comes ahead of profit-seeking as a matter of the corporation's
mission, and directors owe a duty of loyalty to that hierarchy. In so creating that hierarchy, corporation law has imbued
all corporations with the mandatory value system of many sole proprietors, who would rather make less money than
 Page 13
83 S. Cal. L. Rev. 1231, *

reap profits by engaging in illegal businesses or activities. Fidelity to that hierarchy is [*1262] required of corporate
directors in their supervision of the corporation's affairs. n138

Who has the better argument? As a positive matter under Stone, the answer clearly is Strine. However, this debate pre-
supposes that the Stone court may have gotten it wrong. Before Stone, it would not have been difficult to demonstrate
that the standard of review for the duty of loyalty focused on financial conflicts. n139 The real question, then, is this: Set-
ting aside Stone, what is the best characterization of the duty of loyalty?
Strine defends a very broad description of the duty of loyalty on the grounds that "it has been traditional for the
duty of loyalty to be articulated capaciously, in a manner that emphasizes not only the obligation of a loyal fiduciary to
refrain from advantaging herself at the expense of the corporation but, just as importantly, to act affirmatively to further
the corporation's best interests." n140 There are a number of problems with this claim, however.
In the first place, it is not clear that when courts use such capacious language, they are always referring to the duty
of loyalty specifically, as opposed to fiduciary duties generally. Take, for example, the classic language in Guth, which
was quoted earlier. n141 This passage generally is considered to refer to the duty of loyalty. Because the facts of the case
involved the duty of loyalty, this is a natural inference. Close examination, however, reveals that most of the passage
actually deals with fiduciary duties generally, rather than the duty of loyalty specifically. It is noteworthy that Strine
describes loyalty as including not only a negative component, but also an affirmative component. Linguistically, this
phrasing reflects an attempt to expand the breadth of loyalty. By comparison, the Guth court describes a fiduciary's duty
as including not only an affirmative component, but also a negative component. Only thereafter does the opinion men-
tion loyalty; and when it does so, it focuses on conflicts of interest. Thus, for the entire passage to be interpreted as re-
ferring to the duty of loyalty, the Guth court would have had to consider loyalty as consisting primarily of affirmative
duties and only secondarily of the avoidance of conflicts. This, however, seems doubtful. n142 The more [*1263] rea-
sonable interpretation is that the Guth court was speaking of fiduciary duties generally before turning to the duty of loy-
alty in particular. n143 Thus, Strine's reliance on capacious language is unwarranted. n144
Of course, there have been other cases in which courts have spoken specifically of the duty of loyalty in equally
capacious terms. n145 This [*1264] should not be surprising. Earlier courts were not dealing with the issues that are
relevant today - issues of the precise number of fiduciary duties - and the question probably did not even occur to them.
Moreover, as Strine notes, "the primary equitable duty that was thought to constrain directors until the issuance of the
Van Gorkom decision in 1985 was the duty of loyalty." n146 With litigation focused on the duty of loyalty, it would not
be surprising to find judicial opinions focusing on the duty of loyalty. That does not mean that there was not a separate
duty of care, and possibly a separate duty of good faith. n147
Finally, every fiduciary duty can be described in either broad or narrow terms. One manifestation of this is the di-
vergence between standards of conduct and standards of review. n148 Just as the duty of loyalty can be described capa-
ciously, so can the duties of care and good faith. Thus, there may be significant overlap among duties, in which case it
would be unfair to characterize any one duty as a subset of another. n149
The standard of conduct for a fiduciary duty often is significantly broader than the standard of review, but the two
are closely related. They should be similar in scope, with the major difference being that the former demands more of
directors than the latter. This is how it works with the duty of care. The standard of conduct requires ordinary care - the
avoidance of negligence - while the standard of review requires more evidence of wrong-doing - gross negligence. n150
The subject matter of the two standards is identical. Effectively, I have argued earlier that this pattern [*1265] is true
of other fiduciary duties, as well. n151 The same should hold true for the duty of loyalty. Just as the standard of review
focuses on conflicts of interest, so too should the standard of conduct be understood to focus on conflicts of interest. n152
Strine decries the "rhetorical shrinking of the concept of loyalty" that would reduce the duty of loyalty to financial
conflicts, n153 but the duty of loyalty is often described as relating primarily to financial conflicts. n154 Until Stone, it was
broader in rhetoric only. In fact, only months before its Stone decision, in the Disney case, the Delaware Supreme Court
said the following:

The universe of fiduciary misconduct is not limited to either disloyalty in the classic sense (i.e., preferring the adverse
self-interest of the fiduciary or of a related person to the interest of the corporation) or gross negligence. Cases have
arisen where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more
culpable than simple inattention or failure to be informed of all facts material to the decision. To protect the interests of
 Page 14
83 S. Cal. L. Rev. 1231, *

the corporation and its shareholders, fiduciary conduct of this kind, which does not involve disloyalty (as traditionally
defined) but is qualitatively more culpable than gross negligence, should be proscribed. A vehicle is needed to address
such violations doctrinally, and that doctrinal vehicle is the duty to act in good faith. n155

Even if this passage can be said to be consistent with the later opinion in [*1266] Stone, which is doubtful, it estab-
lishes, at the very least, that the "classic" or "traditional" understanding of disloyalty refers to conflicts of interest.
Moreover, in Stone, the court described the claim "that the fiduciary duty of loyalty is not limited to cases involving a
financial or other cognizable fiduciary conflict of interest" as a "doctrinal consequence" of its novel interpretation of
good faith. n156 If this is correct and the (traditional) duty of loyalty is primarily about the avoidance of conflicts then an
intentional violation of law is not necessarily a breach of the duty of loyalty.
Because the issue ultimately is more semantic than legal in nature, a commonsense approach would be helpful. The
question, phrased generally, is this: Can one be honest without being loyal and loyal without being honest? The fair an-
swer seems to be yes. One can be honest without being loyal by disclosing the conflict, n157 and one can be loyal without
being honest by acting paternalistically. n158
Phrased more specifically, the question is this: Can a director who intentionally violates the law be considered loyal
to the corporation and its shareholders? Some very prominent commentators who have considered the question seem to
think so. n159 Strine argues not: he believes that by violating the law, a director is not being loyal to the corporation or to
its shareholders, who have not authorized the illegal actions. n160 This is a highly legalistic answer, and one that is not
satisfying on a gut level. n161
[*1267] Of course the courts cannot allow intentional violations of law. That does not mean that no one will ever
want to violate the law, however. Realistically, the corporation and its shareholders may sometimes want the corpora-
tion to undertake illegal actions for pecuniary benefit even though the law forbids it. n162 Shareholders may communicate
their desire for such an undertaking to the fiduciaries, either implicitly or explicitly. n163 If this occurs and the directors
comply, it is theoretically possible for directors to violate the law intentionally without being disloyal to the corporation
and its shareholders. Any "disloyalty" would be to the law and to society, which is not what the duty of loyalty is about.
n164
Of course, it may be difficult to determine when intentional violations of law would be loyal and when they would
be disloyal. This problem very well may warrant a prophylactic rule forbidding intentional violations of law. Such a
rule, however, would be based on practical considerations rather than on loyalty itself.
Finally, it is unfair to say that any violation of the law, however small and regardless of the circumstances, would
amount to a breach of the duty of loyalty. Difficult situations may require managers to prioritize among conflicting du-
ties. In such cases, a director may reasonably conclude that it would be in the interests of the corporation and its share-
holders to violate a very minor law in order to achieve a significant benefit - for example, double-parking in order to
make an important delivery. n165 Such a decision may be wrong and illegal, but it would not necessarily be disloyal.
To be perfectly clear, I am not arguing that an intentional violation of law is ever acceptable or that it is not neces-
sarily a breach of fiduciary duty. I am only arguing that it is not necessarily disloyal. If there is a breach of fiduciary
duty, it is of the duty of good faith. Intentional violations of the law may be disloyal in many cases - perhaps even most
cases - but they are not intrinsically so.
[*1268]
C. Delaware General Corporation Law

Another line of argument in the debate between Strine and Eisenberg focuses on the use of the term good faith in the
Delaware General Corporation Law. Eisenberg argues that "there is little doubt that as a matter of positive law, corpo-
rate managers owe a duty of good faith." n166 He refers to section 145, which conditions director indemnification on good
faith; section 144, which allows transactions tainted by a conflict of interest to be cleansed by the approval of disinter-
ested directors provided that they act in good faith; and section 102(b)(7), which does not allow directors to be excul-
pated for liability for acts or omissions not in good faith. n167
Strine discusses the various statutory provisions as well. He insists that the use of the term is consistent with his
understanding of good faith as pertaining to the state of mind of a loyal fiduciary. n168 At least with respect to sections
144 and 145, however, there is more assertion than argument. Strine can be summarized as follows: "To us, it is obvious
that these requirements reflect[] a statutory adoption of the core concept of loyalty, which is that directors must act in
 Page 15
83 S. Cal. L. Rev. 1231, *

the good faith belief that their decision will benefit the corporation and its stockholders ratably and not for an improper
purpose." n169 This does not refute Eisenberg's arguments.
Strine's best arguments are raised in the discussion of section 102(b)(7). That provision reads as follows:

The certificate of incorporation may ... contain ... the following ... :

... .

A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability
of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of
this title; or (iv) for any transaction from which the director derived an improper personal benefit. n170

Strine admits that the separate references to loyalty and good faith [*1269] may suggest that the two are separate
duties. n171 He argues, however, that this is merely "redundancy" which "operates as a belt-and-suspenders protection
against unintended consequences." n172
Strine suggests that the provision could have been written, and should be interpreted, as follows:

The certificate of incorporation may include a provision eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damage for breach of fiduciary duty of care as a director, provided that
such provisions shall not eliminate or limit the liability of a director for a breach of the duty of loyalty, including but not
limited to any:

i) transactions from which the director derived an unfair or improper personal profit or benefit;

ii) acts or omissions not in good faith;

iii) intentional misconduct; or

iv) knowing violations of law.

In addition, the certificate may not limit a director's liability for a violation of § 174 of this chapter. n173

In fact, this interpretation reflects significant revision. Strine does not have a very good explanation for why the draft-
ers did not mean what they said or say what they meant. His only explanation for the inclusion of the duty of good faith
was that the plaintiffs' bar insisted on it. n174 Far from proving his point, however, this actually establishes that practicing
 Page 16
83 S. Cal. L. Rev. 1231, *

attorneys believed that good faith was something different from loyalty. Because this demand prevailed, it seems odd to
suggest that the secret intentions of the drafters should govern.
If, as Strine argues, the drafters wanted to distinguish between the duty of care, which is exculpable, and the duty of
loyalty, which is not, n175 they could have rewritten the statute as easily as Strine did. There is an even easier solution,
however: the provision could have stated simply that only breaches of the duty of care may be exculpable, without men-
tioning [*1270] the duty of loyalty or anything else. The solution is so obvious that I often have wondered why they
did not settle on it. n176 In any event, regardless of what the drafters could have done or should have done, the law re-
flects only what they did in fact.
Strine raises a similar counterargument. He notes that there is no "indication that the statute was intended to recog-
nize new fiduciary duties," n177 and that the statute refers to loyalty as a "duty," but to good faith only as the quality of an
act or omission, and not as a "duty." n178 Thus, his argument runs, the statute should not be interpreted as creating a new
duty. This is a fair point, but no one has argued that the statute should be interpreted in that way. The concept of good
faith significantly predates section 102(b)(7). Those who claim that good faith is an independent duty insist that it has
always existed, if only implicitly. n179
Strine also argues that the reliance on section 102(b)(7) to prove the existence of a duty of good faith is problem-
atic:

If the separate articulation in section 102(b)(7) from the duty of loyalty of "acts not in good faith" as a category of non-
exculpable conduct supports a more general fiduciary duty of "good faith," section 102(b)(7) becomes a source of sev-
eral new fiduciary duties. Along with the duty to act in good faith, there would emerge no fewer than four other duties:
(1) the duty not to engage in intentional misconduct; (2) the duty not to knowingly violate the law; (3) the duty not to
pay dividends in violation of section 174; and (4) the duty not to receive improper personal benefits. n180

Unfortunately, Strine's argument is too simplistic. He overlooks the fact that the duty of loyalty is dealt with in clause
(i), while bad faith, [*1271] intentional misconduct, and knowing violation of law are dealt with together in clause
(ii). Thus, it is reasonable to interpret the three categories in the second clause as roughly synonymous with each other
but different from clause (i). Clause (iii) deals with improper dividends. This has nothing to do with disloyalty; section
174 exists for the protection of creditors. n181
Clause (iv) is a bit more tricky. Strine argues that

even those inclined to view the obligation of loyalty as an extremely narrow one, consisting only of the negative obliga-
tion not to profit at the expense of the corporation, must admit the difficulty of distinguishing between a breach of the
duty of loyalty and a breach of the duty not to receive an "improper personal benefit." n182

At first glance, this seems like a good point. Clause (iv), however, does not create a "duty not to receive an improper
personal benefit"; it merely provides that directors cannot be exculpated for transactions that result in improper personal
benefits. It is not difficult to imagine that a director who has not been found to have violated the duty of loyalty - be-
cause they are not conflicted (ex ante) - nevertheless could receive an improper personal benefit (ex post). Thus, clause
(iv) presents no difficulty. Its scope exceeds that of the duty of loyalty. In short, it seems entirely fair to read section
102(b)(7) as permitting director exculpations except in cases of (i) breach of the duty of loyalty, (ii) breach of the duty
of good faith, (iii) improper dividends, and (iv) other improper personal benefits.
Thus, the Delaware General Corporation Law provides support for the existence of an independent duty of good
faith. Although it does not explicitly create the duty of good faith, neither does it explicitly create a duty of care or loy-
alty. In each case, it assumes the existence of fiduciary duties that, after all, are equitable rather than legal concepts.
[*1272]
D. Plausibility of Strine's Thesis

Strine spends significant effort attempting to demonstrate that legal usage of the terms good faith and loyalty are con-
sistent with his theory. Ultimately, Strine succeeds in creating a framework for the conceptualization of fiduciary duties
 Page 17
83 S. Cal. L. Rev. 1231, *

that is plausible, but by no means compelling or definitive. The problem for Strine is that Eisenberg's framework, con-
sistent with the triadic formulation of fiduciary duties, is also reasonable.
Close examination reveals that Strine's persuasiveness stems primarily from the fact that he tells the reader what to
look for before examining the evidence. This approach is perfectly valid in that it makes it easier to follow the argu-
ment. To a great extent, however, Strine's argument depends on presenting the lens through which the reader can view
the evidence. Although Strine repeatedly asserts that his interpretations are "clear," n183 independent review of the evi-
dence (without Strine's gloss) would not necessarily lead the reader to the same conclusions.
For example, Strine argues that "the term good faith has long been used as the key element in defining the state of
mind that must motivate a loyal fiduciary." n184 It is understandable that he might think so. After all, the primary compo-
nents of good faith - honesty and sincerity - are states of mind. Good faith, however, is not necessarily so limited. n185 It
certainly does not follow that good faith is merely a subset of the duty of loyalty. That step requires a leap in logic that
is facilitated by the lens that Strine provides at the outset. Without this lens, Strine's work is merely an argument in sup-
port of an alternative way of thinking about good faith.
The lens that Strine provides is a broad interpretation of the duty of loyalty - as the duty to serve the legitimate in-
terests of the corporation - and a correspondingly narrow interpretation of the duty of good faith - as the subjective com-
ponent of loyalty. One just as easily could argue, however, that loyalty is an objective component of good faith, n186 or
that the two are simply different. In fact, much of the evidence supplied by Strine [*1273] highlights the importance
of good faith in the law of fiduciary duties and actually supports the claim that the duty of good faith is not subordinate
to loyalty, but equal or even superior to it.
To illustrate the point, I will reproduce many of the passages that Strine quotes in support of his proposition, but
without his contextualizations. Notice that in none of the passages is good faith represented as subordinate to or part of
loyalty. To the contrary, loyalty is not even mentioned in the majority of the following passages.
Consider first the passages quoted by Strine in his discussion of agency law:
. "The paramount and vital principle of all agencies is good faith, for without it the relation of principal and agent
could not well exist." n187
. "The relation existing between a principal and his agent is a fiduciary one, and consequently the most absolute
good faith is essential. The principal relies upon the fidelity and integrity of the agent, and it is the duty of the agent, in
return, to be loyal to the trust imposed in him, and to execute it with the single purpose of advancing his principal's in-
terests." n188
. "It is the duty of the agent to exercise good faith and loyalty toward the principal in the transaction of the business
entrusted to him." n189
From all of this, Strine concludes that "it is the agent's general duty to act loyally - that is, in the interests of the
principal - that gives rise to the more specific duty to avoid taking positions in which the agent's interests are in conflict
with those of the principal." n190 However, this conclusion depends on the assumption that acting "in the interests of the
principal" is the demand of loyalty alone rather than of fiduciary duties generally, or of each fiduciary duty in a particu-
lar way. n191 On their own, the passages seem to emphasize the importance of good faith rather than loyalty.
Consider next the passages quoted by Strine in his discussion of trust law:
[*1274] . "There are circumstances ... [the trustee's financial self-interest]which raise a presumption of bad faith
on the part of the trustee." n192
. "Trustee Should Exercise Good Faith and Due Diligence in Protection of Estate." n193
. "Absolute and most scrupulous good faith is the very essence of the trustee's obligation. The first and principal
duty arising from this fiduciary relation is to act in all matters of the trust wholly for the benefit of the beneficiary." n194
Again, this evidence leads Strine to conclude that "the bond between loyalty and good faith is inseparable." n195
Standing alone, however, these passages suggest that it is good faith, rather than loyalty, that demands that the fiduciary
act in the interests of the beneficiary.
Consider the passages quoted by Strine when he turns to corporations:
 Page 18
83 S. Cal. L. Rev. 1231, *

. "The underlying principles have not changed during the years. Directors are held to two fundamental tests: (a)
honesty and good faith; [and] (b) diligence." n196
. "It is an implied condition that [the director's] discretion shall be used in good faith for the benefit of the principal,
and in accordance with the true purpose of the agent's appointment ... . It is manifest, therefore, that the directors of a
corporation occupy a position of the highest trust and confidence, and that the utmost good faith is required in the exer-
cise of the powers conferred upon them." n197
. "Directors "must exercise the utmost good faith in all transactions touching their duties to the corporation and its
property' and ... all their acts must be for the benefit of the corporation, [*1275] and not for their own benefit." n198
. "Directors ... of a corporation are liable to it for any loss which it may sustain by reason of their refusal or failure
to enter into a contract for its benefit, if they do not act in good faith." n199
Strine even quotes S. Samuel Arsht:
. "A director may also lose the benefit of the business judgment rule if plaintiff proves that the director's challenged
decision was prompted by improper motive, that the director was not truly independent from an interested party, or any
other circumstance demonstrating a lack of good faith." n200
Again, Strine concludes that these passages demonstrate "the equivalence of loyalty and good faith." n201 A more
straightforward reading of these passages, however, suggests that good faith is a, and perhaps the, paramount duty and
that the avoidance of conflicts is a subset of that duty.
The case law that Strine quotes in the same section carries a similar import n202:
. "[A director or officer] stands in a fiduciary relation which requires him to exercise the utmost good faith in man-
aging the business affairs of the company with a view to promote, not his own interests, but the common interests, and
he cannot directly or indirectly derive any personal benefit or advantage by reason of his position distinct from the
coshareholders." n203
. "A complete absence of selfish motive and of personal profit on their part forcefully argues that [the directors']
judgment was formed in absolute honesty and entire good faith." n204
[*1276] Once again, these passages highlight the prominence of good faith, not loyalty.
Strine's discussion of takeover cases - Cheff v. Mathes, n205 Unocal, n206 and Revlon n207 - is similar. n208 He shows that
courts demand that directors act in good faith in the best interests of the corporation, but not that good faith is part of the
duty of loyalty. n209
I am not arguing that good faith is superior to loyalty. I believe that they are equal in stature. My point is only that
Strine's evidence does not support his claim that loyalty is superior to, and encompasses, good faith. At most, Strine
only shows that loyalty, fidelity, faithfulness, and good faith are related terms. n210 While this is self-evident, it entails
many different possible explanations and ramifications. n211
E. Conclusion on Semantics

Ultimately, the issue of the relation between good faith and loyalty is not one that can or should be resolved by etymol-
ogy, linguistics, or other semantic arguments. This is because good faith is a legal term that must be given meaning by
way of artificial construction. To some extent the legal term will track common usage, but to some extent it will not.
Moreover, courts sometimes use the term in a legalistic sense and sometimes use it in the more common sense; some-
times, they will switch between the two senses in the same discussion. What is needed is a framework that is not merely
plausible, but one that is also elucidating. And that will not be found by reference to intuitiveness. Common usage gives
us a starting [*1277] point, but the legal definition must ultimately be based on functional considerations as well.
IV. HOW TO THINK ABOUT FIDUCIARY DUTIES

In Part III, I argued that the current debate has improperly concentrated on semantic arguments. What is needed is a
framework that will provide a solid and stable foundation for courts and practitioners. In this part, I hope to provide
such a framework.
 Page 19
83 S. Cal. L. Rev. 1231, *

In a 2007 essay, Hill and McDonnell argue that fiduciary duties can be understood at varying levels of abstraction.
This crucial insight helps explain the relationship among the various fiduciary duties. Most importantly, it highlights
n212

the fact that the answer to the question of how many fiduciary duties there are in corporate law can be virtually any
number, depending on the level of abstraction considered. Thus, there is no single correct answer. Any answer may be
correct in some respects, but none is accurate in every respect. In this part, I argue that, if the question must be asked,
the best answer is five: distinguishing among fiduciary duties based on the paradigms for enforcement is most likely to
lead to meaningful distinctions without risk of confusion.
In Section A, I explain the concept of levels of abstraction. In Section B, I explain how, at the highest level of ab-
straction, there is only one fiduciary duty. I argue that this fundamental duty is different from any of the particular fidu-
ciary duties and comprises all of them. In Section C, I demonstrate that it is possible to move with increasing specificity
to almost any number of fiduciary duties. In Section D, I argue that the most helpful level of abstraction is what I call
the third level. This level distinguishes among the paradigms for enforcement of fiduciary duties. In Section E, I argue
that simplifying the law so that there are two fiduciary duties can lead to oversimplification, and doing so risks collaps-
ing the five paradigms for enforcement into two, resulting in a loss of precision and nuance. In Section F, I argue that
the inherent complexity of the law of fiduciary duties makes it difficult to organize them along a single linear contin-
uum, and that a better way of conceptualizing fiduciary duties is as a Venn diagram. Such an image highlights the fact
that fiduciary duties are not entirely independent of each other but have significant overlap. In Section G, I explain the
nature of the overlap. I argue that the determination of which fiduciary duty is involved in a case corresponds not to di-
rector [*1278] conduct, as is commonly believed, but rather to the shareholders' concerns about the conduct. Thus, a
director's actions may implicate any or all of the fiduciary duties, depending on the circumstances and the available evi-
dence. I conclude in Section H with a summary.
A. Levels of Abstraction

Hill and McDonnell have described fiduciary duties as follows:

Director duties, and breaches thereof, fall along a continuum. There are stylized cases at both ends, where the proce-
dures have been well developed. Care, with its very strong deference, which essentially translates into "plaintiff loses"
(and even if he did not lose, there would be exculpation), is at one extreme. Traditional loyalty, where the defendant has
to show good process (in the form of approval by disinterested and fully informed directors, shareholders, or both) or,
failing that, very good substance (that is, "entire" or "intrinsic" fairness), is at the other extreme. Of most interest here
are the cases that fall between these extremes, where we think good faith will increasingly become part of the doctrinal
story.

In dividing up the cases along this continuum, we can think at varying levels of abstraction ... . At the very highest
level, there is just one fiduciary duty - to pursue faithfully and diligently the best interests of the corporation and its
shareholders. Below this level of abstraction, we can see the continuum of cases as divided into the two traditional cate-
gories, care and loyalty. Why divide the cases this way? As we discuss above and below, we put into the care category
circumstances where we want courts to largely avoid scrutinizing board behavior, such that it is extremely unlikely that
directors will ever be held personally liable. Loyalty cases deserve at least a bit of (and sometimes quite a bit of) a
closer look from courts.

One level of abstraction below that, we divide the loyalty category into two parts. One part, at the extreme end, is tradi-
tional loyalty cases, where directors or officers have a pecuniary material interest that conflicts with the interests of the
corporation. The other part is good faith. This includes the intermediate cases that fall between traditional care and tra-
ditional loyalty. Why is this division of the broad loyalty category useful? Cases presenting facts that fall in the tradi-
tional loyalty category clearly deserve close scrutiny from some sort of independent decision maker, be it independent
directors, shareholders, or the courts. We have well-established rules for these sorts of cases. Good faith is a more nebu-
lous category. It includes many different kinds of factual circumstances, united by the fact that we have some reason to
be concerned about director objectivity (hence, they are not care cases), but [*1279] the stark concerns of traditional
 Page 20
83 S. Cal. L. Rev. 1231, *

conflicts of interest are not present (hence, they are not traditional loyalty cases). It is thus useful to distinguish good
faith from traditional loyalty.

If we then descend one more level of abstraction, we find that the good faith region in turn subdivides at present into a
variety of different factual circumstances and related standards of review. The more specific standards of review give
structured guidance to courts, corporations, and their counselors where the facts fall within the scope of those specific
standards. The general backdrop of good faith gives courts flexibility to deal with new circumstances that do not fit
within better defined standards of review, and to develop new specific standards for other sorts of cases where appropri-
ate. n213

The insight that fiduciary duties can be understood at varying levels of abstraction is a crucial one. It can help explain
and reconcile judicial opinions and scholarly theories that appear incompatible. It also provides a robust intellectual
framework within which both judges and scholars can work. The increased intellectual latitude allows for the discovery
of new insights regarding fiduciary duties while leading to the realization that no single perspective has an exclusive
lock on the truth. Many different theories may be true to a point, but ultimately are inadequate in some respects. What
rings true at one level of abstraction may seem wrong at another level.
Unfortunately, Hill and McDonnell develop their theory improperly. Three related errors prove fatal. First, they
position the duty of good faith within the duty of loyalty. n214 This is to be expected because their essay is an attempt to
deal with the recent case of Stone. Second, they position good faith in between care and loyalty as a sort of intermediate
fiduciary duty. n215 As I will demonstrate, however, good faith does not lie between care and loyalty, but rather at the
extreme. Third, they describe fiduciary duties as falling along a linear continuum. n216 As I will argue in the following
sections, this provides an inadequate understanding of fiduciary duties, which are significantly more complex.
The claim that good faith lies between care and loyalty dates back to an earlier article in which Hill and McDonnell
tackle structural bias. n217 [*1280] Their thesis is understandable. There is significant intermediate ground between
care and loyalty and, as I have argued in earlier work, it has to do primarily with structural bias. n218 Moreover, the duty
of good faith is an emerging area of law that is somewhat "nebulous" n219 because it has not yet been defined very well.
Thus, it is not surprising that Hill and McDonnell would turn to good faith to deal with structural bias. The intermediate
ground that they identify, however, is not good faith.
Good faith is about intentional misconduct. n220 Structural bias is not. Structural bias is about subtle influences that
affect the decisionmaking process, often unconsciously. n221 These influences are essentially conflicts of interest that do
not rise to the level of self-dealing. Even in cases involving self-dealing, there need not be any actual misconduct - that
is why the law gives directors the opportunity to prove fairness. n222 Because these influences undermine confidence in
the decisionmaking process, however, tainted decisions are subjected to heightened review. n223
Moreover, the standards of review that are employed in cases of structural bias and those involving good faith are
entirely dissimilar. Structural bias invokes the third paradigm for the enforcement of fiduciary duties. Such cases are
subjected to an intermediate standard of review - reasonableness - which lies somewhere between the leniency given to
care cases and the strictness accorded to loyalty cases. n224 Good faith, on the other hand, invokes the fourth paradigm. In
such cases, the shareholders bear the heavy burden of establishing intentional misconduct. n225 This is significantly more
onerous than reasonableness, or even gross negligence. n226
In short, Hill and McDonnell are wrong to identify the duty of good faith with the intermediate standards of review
and structural bias. In doing so, they conflate the third and fourth paradigms for the enforcement of [*1281] fiduciary
duties, which are actually very different from each other. I will explore the levels of abstraction with these differences in
mind.
B. One Fundamental Fiduciary Duty

As to their first step, Hill and McDonnell are clearly correct: "At the very highest level, there is just one fiduciary duty
- to pursue ... the best interests of the corporation and its shareholders." n227 This should not be controversial: Strine
agrees, n228 and I can think of no reason why Eisenberg would not. Nevertheless, the exact nature of this one fundamental
fiduciary duty is controversial.
 Page 21
83 S. Cal. L. Rev. 1231, *

According to both Strine and Hill and McDonnell, the one fundamental fiduciary duty is, essentially, the duty of
loyalty. n229 They view the duty of loyalty as a broad mandate to pursue the interests of the corporation, and everything
else as falling within its expansive scope. There is one important, if technical, problem with this view: if every breach of
fiduciary duty were a breach of the duty of loyalty, then no breach of fiduciary duty would be exculpable under section
102(b)(7). n230 Setting aside that issue, however, the claim seems plausible on its face. Yet other theories also are reason-
able.
In an article about the duty of care, Lyman Johnson sets forth the foundation for a claim that the one fundamental
fiduciary duty is the duty of care. n231 He argues that "far from being a simple concept, care is multidimensional," with
"at least three meanings." n232 First, directors are required to ""take care of' the corporation's business and affairs." n233
Second, a board must ""care for' the interests of the corporate enterprise and its shareholders, ... not the directors' inter-
ests or those of any other [*1282] party." n234 Third, "directors are to act "carefully' or in a careful manner." n235 Such a
broad understanding of the duty of care subsumes the other fiduciary duties. In Johnson's words, the second meaning,
"care as solicitude for the interests of the enterprise and shareholders[,] is the foundation of the notions of loyalty and
good faith." n236
Aronson v. Lewis n237 lends some support to Johnson's argument. n238 Its classic formulation of the duty of care pro-
vides that a director must not only become informed but also put the information to good use. n239 This formulation im-
plicitly recognizes that the standard of conduct (as opposed to the standard of review) for the duty of care is not con-
cerned solely with empty procedural formalities. Instead, the duty of care is about meaningful decisionmaking, which is
aided by process but requires more. It requires an openness to the process that is incompatible with insincerity and con-
flicts of interest. Thus, if the understanding of the duty of care is sufficiently broad, it can encompass the duties of good
faith and loyalty.
It would be equally possible to argue that the one fundamental duty is the duty of good faith. n240 After all, the core
duty of pursuing the interests of the corporation and its shareholders is perfectly consistent with the duty of good faith,
which, broadly understood, is to pursue the interests of the corporation and its shareholders honestly and sincerely, and
without intentional misconduct of any kind. Moreover, as demonstrated earlier, much of the law's discussion of fiduci-
ary duties revolves around the notion of good faith. n241
Good faith is the indispensible prerequisite to the fulfillment of [*1283] fiduciary duties. n242 In fact, it is possible
to view the other fiduciary duties as proxies for good faith. A shareholder can always prevail by establishing bad faith
on the part of directors. Bad faith is extremely difficult to prove, however. Thus, the duty of care and the duty of loyalty
can be seen as tools to ascertain whether the directors are acting in good faith. Of course, merely being careless or con-
flicted does not, in itself, indicate bad faith; but neither does it result in a breach of fiduciary duty. However, when a
director is exceedingly careless - that is, grossly negligent - or has a material conflict and cannot establish that the trans-
action is fair, there is a reasonable inference that his actions have not been taken in the utmost good faith. In other
words, gross negligence and unfairness can be considered objective signs of bad faith. n243 When they are established,
directors are held liable as if they had acted in bad faith.
Of course, Strine would take issue with such arguments. According to the Vice Chancellor,

There might be situations when a director acts in subjective good faith and is yet not loyal (e.g., if the director is inter-
ested in a transaction subject to the entire fairness standard and cannot prove financial fairness), but there is no case in
which a director can act in subjective bad faith towards the corporation and act loyally [because a director acting in bad
faith is not being loyal to the corporation]. n244
Strine believes this proves that good faith is a subset of loyalty. It does not. The same thing could be said of the re-
lationship between the duties of care and good faith: there might be situations in which a director acts in subjective good
faith and is yet not careful (for example, if the director has the intent to benefit the corporation and is grossly negligent),
but there is no case in which a director can act in subjective bad faith toward the corporation and act with care (because
a director acting in bad faith is not caring for the corporation). n245 Thus, good faith is more than merely a subset of loy-
alty. It may be a subset of both care and loyalty, but a more reasonable conclusion would be that good faith is different
from and yet related to both. n246
 Page 22
83 S. Cal. L. Rev. 1231, *

[*1284] The problem with these claims is that, with a slight tweaking of definitions, the statements can be re-
versed. All that is required is that good faith be interpreted broadly and that care and loyalty be interpreted more nar-
rowly. Then it reasonably could be said that (1) there might be situations in which a director acts loyally and yet does
not act in good faith (for example, if the director is not interested in the transaction but engages in intentional miscon-
duct), but there is no case in which a director can act disloyally toward the corporation and act in good faith (because a
director who is disloyal is not acting in good faith); and (2) there might be situations in which a director acts carefully
and yet does not act in good faith (for example, if the director follows appropriate procedures but engages in intentional
misconduct), but there is no case in which a director can act carelessly toward the corporation and act in good faith (be-
cause a director who is careless is not acting in good faith). The plausibility of these statements, like the plausibility of
the earlier statements, depends on a willingness to generalize and ignore details.
This demonstrates that such arguments are nothing more than semantics. Just as fiduciary duties generally can be
viewed at different levels of abstraction, so too can individual duties be viewed at different levels of abstraction. This
conceptual flexibility is what allows one duty to be portrayed as superior to, and encompassing, the others. Because
each duty can be characterized broadly or narrowly, however, such claims are inherently unreliable.
I argued above that it was equally possible to consider any of the particular fiduciary duties as the one fundamental
duty. The best way to think about the one fundamental duty, however, is to view it as something different from any of
them; or rather, as comprising all of them. n247 Conceptually, this single fundamental fiduciary duty can be broken down
in different ways at different levels of abstraction depending on the need. Ultimately, the various duties are all related
precisely because they are all aspects of the one fundamental fiduciary duty. n248
[*1285]
C. Levels of Specificity

Beyond the one fundamental fiduciary duty, there are many possibilities. n249 Both Strine and Hill and McDonnell sug-
gest that the next step bifurcates fiduciary duties into care and loyalty based on the potential for director liability. n250
This type of bifurcation seems perfectly reasonable. What is more questionable is the decision to label the categories
"care" and "loyalty." It is true that care and traditional loyalty fit those descriptions, but it assumes the conclusion to say
that everything in the former category is the duty of care and everything in the latter category is the duty of loyalty. To
determine whether that is the case, further consideration is necessary.
The distinction at this second level of abstraction technically is quite small. According to Hill and McDonnell,

we put into the care category circumstances where we want courts to largely avoid scrutinizing board behavior, such
that it is extremely unlikely that directors will ever be held personally liable. Loyalty cases deserve at least a bit of (and
sometimes quite a bit of) a closer look from courts. n251

This suggests that the key distinction concerns the level of judicial scrutiny. That is not quite accurate, however.
Whether or not it is a subset of loyalty, the duty of good faith certainly belongs in the same category at the second level
of abstraction. Yet good faith does not get nearly the level of scrutiny that loyalty does. From the director's perspective,
the review for good faith is quite lenient, n252 while review for loyalty is quite demanding. Nor is the distinction based on
the possibility of personal liability. After all, the duty of care can lead to liability as well, unless the shareholders have
adopted a director exculpation amendment to the corporate charter. n253 The distinction [*1286] is actually a narrow
one, described by Strine as "distinguishing between two forms of director conduct: (1) conduct that ... should be remedi-
able by an award of monetary damages, and (2) conduct that involves an exculpable or indemnifiable breach." n254
I would characterize the distinction at the second level of abstraction differently. I believe that the second level dis-
tinguishes between situations in which directors merely drop the ball - for example, because they were careless - and
those in which directors do something worse - whether they engage in actual misconduct or simply put themselves in a
situation where misconduct is more likely. n255 This happens to correspond very well to the likelihood of liability. Alt-
hough it is a bit more vague, it is also more meaningful.
According to Hill and McDonnell, "One level of abstraction below that, we divide the loyalty category into two
parts. One part ... is traditional loyalty cases ... . The other part is good faith." n256 This third level of abstraction is con-
sistent with the now-defunct triad of fiduciary duties. It is important to notice that at this level of abstraction, Strine and
 Page 23
83 S. Cal. L. Rev. 1231, *

Hill and McDonnell are in agreement with Eisenberg. The difference is primarily one of semantics. They all agree, more
or less, n257 that there are three categories of duties which, at least colloquially, could be labeled care, loyalty, and good
faith. n258 The difference is that Strine and Hill and McDonnell would apply the label "duty of loyalty" at the second
level and say that traditional loyalty and good faith are both subsets, while Eisenberg might (and I would) apply the la-
bel "duty of loyalty" at this third level, making traditional loyalty and good faith independent of each other and on equal
footing with care.
Subsequent levels of specificity may be characterized in many different ways. n259 Because the current debate fo-
cuses on the first three [*1287] levels of abstraction, I will offer only brief thoughts. A fourth level of abstraction
might spell out the contents of each particular duty. For example, according to the Disney court, the duty of good faith
may consist of the duties to avoid intentional misconduct, intentional violation of law, and conscious disregard of du-
ties, among other things. n260 According to Strine, the duty of care may include the duties of "informedness, prudence,
advisedness, preparedness, and diligence." n261 Likewise, the duty of loyalty may consist of the duties to not engage in a
self-dealing transaction, to avoid other material conflicts, and to not misappropriate a corporate opportunity. n262 A fifth
level could go even further and specify the particular conduct requirements of each duty. Thus, for example, the duty of
informedness might include the duties to gather all information that is already available, to use reasonable efforts to
generate new information, to read reports, and to participate in board meetings. Subsequent levels could go into even
greater specificity. At some point, there is a move beyond the level of general principle, and even specific conduct can
be considered a fiduciary duty. Thus, for example, it could be said that, in Van Gorkom, the directors had a fiduciary
duty to meet for more than two hours. n263 That "duty" was particular to that case, however, and it is not a fair statement
of law to say that board meetings generally must last more than two hours.
The insight that fiduciary duties can be viewed at different levels of abstraction helps to explain theories about fidu-
ciary duties that seem to conflict. For example, it reveals that Strine and Eisenberg are not that far apart after all. It also
reveals that the question about the precise number of fiduciary duties in corporate law is misleading and ultimately irrel-
evant. It can be fair to say that there is only one fiduciary duty, or that there are two, or three, or almost any number. It
would even be fair to say that there are dozens, or hundreds, or even thousands of duties at sufficiently low levels
[*1288] of abstraction. Each claim can be true in some respects without making the others wrong in other respects. Of
course, in the hands of any capable jurist, it is all irrelevant. As long as the necessary distinctions are preserved - espe-
cially the five paradigms for the enforcement of fiduciary duties - it does not matter how the fiduciary duties are num-
bered or categorized. It is simply a matter of preference.
There are at least two remaining problems that must be dealt with. The framework discussed so far does not seem
to account for everything. For example, it does not deal well with hybrid concepts such as bias and intermediate stand-
ards of review. I address this concern in the next section. Perhaps more problematic are duties such as the duty of dis-
closure. Where does such a duty fit in? It has alternatively been described as fitting in with care, loyalty, good faith, or
all three. n264 Is this a separate duty, and if not, how should it be dealt with? I address this concern in a subsequent sec-
tion.
D. Five Fiduciary Duties

Thus far, I have argued that at the highest level of abstraction, there is only one fiduciary duty; at a slightly lower level,
there is a bifurcation of fiduciary duties; and at a third level, there is the triad of fiduciary duties - care, loyalty, and
good faith. Essentially, the current debate, manifested in the exchange between Strine and Eisenberg, has been about
which level of abstraction - the second or the third - is the most appropriate level for discussions of fiduciary duties and
for assigning labels such as the duty of loyalty. Is the important distinction that of the second level, such that exculpable
duties ought to be labeled the duty of care and all nonexculpable duties the duty of loyalty, or is the more meaningful
level the third level, such that a triad of fiduciary duties is more sensible?
There is no doubt that a distinction concerning the potential for liability, like the one at the second level, is an im-
portant one. n265 The [*1289] question is whether it is the most important feature to highlight. On the one hand, it
probably is the distinction that is of greatest concern to shareholders and directors alike. On the other hand, it is a highly
simplistic distinction, and one that does not tell us very much about the fiduciary duties themselves. Most of the infor-
mation derived from the second level of abstraction comes not from the distinction itself but from the label assigned to
the distinction. Differentiating among duties that can and cannot be exculpated tells us only that some breaches of fidu-
ciary duty are worse than others. It does not tell us how they are worse or how much worse. The labels "care" and "loy-
alty" are what begin to convey some substantive meaning. Because the term loyalty would be defined capaciously, how-
ever, it does not tell us much more than that it is somehow worse than carelessness. n266
 Page 24
83 S. Cal. L. Rev. 1231, *

Compare that with the third level. The triadic formulation tells us significantly more about the fiduciary duties
themselves. It distinguishes among cases in which directors are negligent - care - those in which directors engage in
misconduct - good faith - and those in which directors may or may not have engaged in any misconduct, but in which
there can be no confidence in their judgment because they are conflicted - loyalty. Moreover, the third level does not
sacrifice much of the simplicity of the second level. It is not very difficult to remember that good faith and loyalty viola-
tions are more likely to lead to liability than care violations. Thus, the third level seems to have a descriptive advantage
over the second level without much trade off.
And yet, as noted earlier, there is a problem at the third level of abstraction. The triadic formulation does not ade-
quately deal with the complexity of fiduciary duties, especially structural bias and the intermediate standards of review.
Hill and McDonnell attempt to deal with this problem at a fourth level of abstraction, as a subset of good faith. As I ar-
gued earlier, however, they are mistaken about the nature of good faith, which is completely different from structural
bias. n267 Of course, it would be possible to locate structural bias within good faith arbitrarily, but that would raise two
difficulties. First, the tidy continuum would be destroyed, [*1290] because good faith and structural bias are not lo-
cated near each other on the spectrum. Second, an unnecessary layer of complexity would be introduced. Already, bifur-
cation requires Strine and Hill and McDonnell to explain that there are two duties, care and loyalty, but that loyalty can
be divided into traditional loyalty and good faith. Structural bias requires that good faith be further divided into inten-
tional misconduct and bias. Thus, rather than a simple list of fiduciary duties, there is a complex structure resembling an
outline:

1. care

2. loyalty

a. traditional loyalty

b. good faith

i. intentional misconduct

ii. structural bias

The sole benefit of this convoluted structure is to highlight the distinction between exculpable and nonexculpable du-
ties.
The problem posed by structural bias can be resolved much more easily, by recognizing that the essence of the third
level of abstraction is not the triadic formulation itself, but rather the paradigms for the enforcement of fiduciary duties.
A paradigm-centered approach is compatible with the triadic formulation, but extends it. In addition to care (which cor-
responds to the first paradigm), loyalty (which corresponds to the second paradigm), and good faith (which corresponds
to the fourth paradigm), there are two more components (which correspond to the third and fifth paradigms). This ap-
proach further distinguishes among cases in which directors are not financially conflicted but are nevertheless structur-
ally biased, and those in which directors make an irrational decision. In this Article, I refer to the latter category as "ra-
tionality," and the former category as "objectivity." n268
 Page 25
83 S. Cal. L. Rev. 1231, *

This approach shifts the terms of the discussion. Scholars and jurists have been debating whether there are two fi-
duciary duties or three, but my analysis suggests that a better answer may be five. Thus, it could be said that there is a
duty of care, which covers process; a duty of loyalty, which covers conflicts; a duty of good faith, which covers inten-
tional misconduct; a duty of objectivity, which covers bias; and a duty of rationality, which [*1291] covers sub-
stance. n269 Admittedly, my approach seems more complex than I would like it to be. Any complexity is merely superfi-
cial, however. Moreover, it is unavoidable under the existing law.
A more important criticism is that my approach may seem far-fetched. Are "objectivity" and "rationality" truly fi-
duciary duties on a par with good faith, as well as care and loyalty? Is it even fair to say that there are duties to avoid
structural bias and waste?
A duty to avoid waste does not seem too much of a stretch. Courts may not like to review the substance of business
decisions, but this concern is reflected in an extremely lenient standard of review. A duty to avoid structural bias, on the
other hand, is more problematic. One of the central claims about structural bias is that it is not avoidable; it is a manifes-
tation of a psychological phenomenon known as ingroup bias. n270 Surely the law cannot require directors to do the im-
possible. However, my proposed "duty of objectivity" is not exactly a duty to avoid structural bias. Rather, it is a duty to
be aware of structural bias and a corresponding obligation to be objectively reasonable under the circumstances. n271
The concern underlying the duty of objectivity is similar to that underlying the duty of loyalty, but it is different in
two important respects. First, it is less direct and severe. Directors may be conflicted, but the conflict does not rise to the
level of self-dealing. This is why less is required of directors to escape breach - not entire fairness, but only reasonable-
ness. n272 Second, it is not a situation that can be avoided. Whereas directors can avoid self-dealing transactions alto-
gether and abstain in other situations involving a conflict, structural bias involves situations that are not created by di-
rectors. n273 Because directors cannot avoid structural bias, they must remain aware of it and deal with it reasonably.
Thus, although objectivity sounds like a subset of loyalty, it more closely resembles care in terms of culpability. This is
why I have argued in earlier work that breaches of the duty of objectivity probably should be exculpable. n274 Sharehold-
ers [*1292] should be relegated to injunctive relief. n275 Because the duty of objectivity lies directly between the duties
of care and loyalty, the question of exculpability is a close one and reasonable people can disagree. I maintain, however,
that the duty of objectivity is a situation in which directors have dropped the ball (by not acting reasonably in the face of
bias), rather than having done something worse (such as intentionally engaging in misconduct or putting themselves in a
situation where misconduct is more likely). n276 For this reason, it would be more appropriate to place the duty of objec-
tivity, at the second level of abstraction, on the duty-of-care side of the divide.
Somewhat counterintuitively, n277 I believe that the duty of rationality belongs on the loyalty side of the divide. The
concept of rationality is often described as a duty of substantive care. n278 Moreover, a bad decision seems more like poor
judgment than something worse. As I have pointed out, however, the duty of rationality does not make much sense un-
less it is understood as a proxy for the duty of good faith. n279 As a result, it should be treated in the same way as good
faith. n280 Because the duty of good faith is not exculpable, it follows that the duty of rationality should not be, either.
Scholars, attorneys, and judges need to discuss fiduciary duties efficiently, without the theoretical morass that fasci-
nates scholars. Thus, the law should discuss fiduciary duties, at least by default, in the manner that is most helpful and
productive. Labels ought to be assigned so as to balance the competing goals of description and simplicity. By this crite-
rion, the third level of abstraction, which focuses on the paradigms for enforcement, is superior to the second level,
which merely focuses on the potential for liability. The second level conveys very little information and [*1293] pro-
vides only superficial simplicity. The third level conveys significant information with minimal complexity. Ultimately,
it seems more helpful to say that there are five fiduciary duties, some of which are more likely to lead to liability than
others, than to say that there are two fiduciary duties, but with multiple paradigms for enforcement within them. Thus, if
the question about the number of fiduciary duties must be asked, the best answer is five.
E. The Danger of Collapsing the Standards of Review

Thus far, I have argued that the question - How many fiduciary duties are there in corporate law? - is misleading and
ultimately irrelevant. Because fiduciary duties can be understood at various levels of abstraction, the question can be
answered in many different ways, each of which is correct in some respects and inadequate in others. Moreover, the an-
swer does not matter as long as the inherent complexity of the law of fiduciary duties, including the five paradigms for
enforcement, is preserved. Nevertheless, I argued that, if the question must be asked, the best answer is five. Although
 Page 26
83 S. Cal. L. Rev. 1231, *

this answer, too, is imperfect, there is at least one strong reason why it might be important to say that there are five fidu-
ciary duties rather than two: it may be difficult to preserve the intricacies of the law if it is insisted that there are only
two fiduciary duties.
The claim that there are only two fiduciary duties is rooted in a desire for simplicity. There is no great need for sim-
plification, however, because the numbers at issue are all relatively small. Five duties are not especially more complex
than two, and certainly not beyond the ability of practicing attorneys and sitting judges. Moreover, bifurcation only
leads to a false sense of simplicity. n281 Eventually, jurists will realize that simplification is futile unless the simplicity
extends to substance as well as form. Inevitably, there will be a push to reduce the number of paradigms of enforcement.
The only logical stopping point would be to have one standard of review per fiduciary duty. Thus, the desire for simpli-
fication poses a great risk of oversimplification.
For example, traditional loyalty and good faith could be collapsed into one standard of review under a broad duty of
loyalty. There are three ways this can be done. First, the fairness test, or the second paradigm, could be employed in
cases involving issues of good faith. n282 Under this scenario, [*1294] intentional misconduct would get considerably
stricter review. Second, the intentional misconduct test, or the fourth paradigm, could be employed in cases involving
issues of traditional loyalty. Under this scenario, self-dealing would get considerably less review. Finally, an intermedi-
ate standard of review, somewhere between fairness and intentional misconduct, could be employed in all cases. Under
this scenario, good faith would be overenforced and loyalty would be underenforced. In each case, precision would be
sacrificed for the benefit of simplicity.
Similarly, the duty of care and the duty of rationality could be collapsed into one standard of review under a broad
duty of care. n283 One possibility would be to employ the waste test, or the fifth paradigm, in cases involving issues of
care. Under this scenario, review of process would become even more lenient. Another possibility would be to employ
the gross negligence test, or the first paradigm, to issues of substance. Under this scenario, substance would get signifi-
cantly greater review. A third possibility would be to develop a new intermediate standard of review and employ it in all
cases. Under this scenario, both process and substance suffer to some extent. n284 In any event, precision would once
again be sacrificed for the benefit of simplicity.
The desire for simplicity is not imaginary. Scholars have suggested that the law of fiduciary duties is becoming too
complex. n285 I myself have argued for a simplified approach to structural bias, n286 and my current proposal would have
only one standard of review per fiduciary duty (although I would have more duties). Thus, I believe that the potential
for oversimplification should not be ignored.
In an article coauthored with then-Vice Chancellor, now Justice, Jack Jacobs and Vice Chancellor Strine, Chancel-
lor William Allen proposes a reduction in the number of standards of review. n287 Allen argues that "a rigorous functional
evaluation of existing corporate law standards of review will clarify their application, reduce their number, and facilitate
the task of [*1295] corporate advisors and courts." n288 In the end, he proposes that there be three basic standards of
review corresponding roughly to the first, second, and third paradigms for enforcement. n289 It is worth noting, however,
that good faith was not a very well-developed concept at the time of the article's publication. Presumably, Allen would
add a fourth standard of review corresponding to the fourth paradigm if he were making the argument today. Thus, in
general, the difference between my approach and his is that I would recognize a fifth standard of review for waste,
while he would do away with the concept. n290
Aside from the obvious difference that Allen does not recognize five fiduciary duties, his proposal is structurally
similar to mine. There are noteworthy differences, however. For example, Allen argues that "the relationship between
the Blasius and the Unocal[] doctrines is a fruitful subject for some doctrinal pruning," n291 and that the ""flavoring' dif-
ference" between the two doctrines does not "justify the added doctrinal complexity created by continuing Blasius as a
separate review standard." n292 This conclusion is deeply problematic in two respects. First, it improperly locates Blasius
within the third paradigm (that is, reasonableness) rather than the fourth (that is, intentional misconduct). This is entirely
understandable because it reflects how the courts currently view Blasius, but it is nevertheless misguided. Second, it
erroneously suggests that there is only a ""flavoring' difference" between the two standards that could be remedied by
"trusting the courts" n293 to employ a "gimlet eye." n294 Unfortunately, there may be more to Allen's claim than I would
care to acknowledge. As I have argued in earlier work, the Unocal test has been watered down to the point where its
version of the reasonableness test is not much different from a test for intentional misconduct. n295 In addition, the courts
seem to be backing off the compelling justification standard to [*1296] the point where it may resemble a reasonable-
ness test. n296 Thus, there may be less difference between Unocal and Blasius, as applied, than I would care to admit. Yet
there certainly is a great deal of difference, at least in theory, between the third paradigm - demanding reasonableness in
 Page 27
83 S. Cal. L. Rev. 1231, *

cases involving structural bias - and the fourth - demanding a compelling justification for intentional misconduct. Of
course, the two tests may sometimes lead to the same result, but they do not convey the same concerns. As a result, over
the long run, there almost certainly would be significant differences in outcomes if there were two separate tests. n297
Likewise, Allen would incorporate the Revlon test into Unocal. n298 According to Allen, "Except for requiring the
court to evaluate the reasonableness of the directors' action against the singular objective of current value maximization,
the Revlon standard differs little from the Unocal standard in practical application." n299 The problem with this claim is
the enormity of the exception. I would agree that the courts should reach the same conclusions under a true reasonable-
ness test as they would under Revlon. After all, if the company is for sale, it would be reasonable to seek the best price.
However, it is not at all clear that the courts would reach the same conclusions under the existing Unocal standard. n300
The extent of deference currently afforded to directors suggests that their conduct would not be judged against a "singu-
lar objective."
My point here is not to criticize Allen for eliminating too many standards of review. Rather, it is only to demon-
strate that simplification easily can lead to oversimplification. Assertions that sound plausible in the abstract may not
work out as expected. The best way to avoid this type of mistake is to structure the law of fiduciary duties so as to make
oversimplification unlikely. The desire to associate each fiduciary duty with exactly one standard of review can be miti-
gated by declaring that there are five fiduciary duties.
[*1297]
F. The Complex Relationship Among Fiduciary Duties

In this section, I demonstrate that the inherent complexity of fiduciary duties extends beyond a mere number. I argue
that the relationship among the various fiduciary duties is also complex. Thus, it is inadequate to describe fiduciary du-
ties as lying on a linear continuum.
The inadequacy of linear thinking becomes evident when one attempts to plot the fiduciary duties along a contin-
uum. Hill and McDonnell's attempt is illustrative. They view good faith as occupying the middle ground between care
and loyalty. n301 As discussed earlier, this does not work. n302 The explanation for their error is that they saw three catego-
ries of fiduciary duties - care, traditional loyalty, and good faith - and three categories of standards of review - business
judgment, fairness, and intermediate scrutiny - and assumed that they matched up nicely. Because intermediate stand-
ards of review clearly lie between fairness and business judgment, they concluded that good faith lies between care and
loyalty. They did not realize that there are more than three categories of fiduciary duties and more than three categories
of standards of review.
Even setting aside rationality and waste, Hill and McDonnell should have recognized four categories of fiduciary
duties and of standards of review. While care corresponds to business judgment and loyalty corresponds to fairness,
good faith does not correspond to intermediate scrutiny. Rather, good faith requires a different standard of review and
intermediate scrutiny demands a different fiduciary duty. Had Hill and McDonnell realized this, they could have orga-
nized their continuum differently. Even with this insight, however, it is not obvious how they should have done so. The
relative positions of the duties of care and loyalty are straightforward; the positions of the other three fiduciary duties
are more complicated.
For example, if fiduciary duties are plotted linearly based on the likelihood of liability, one possible sequence
would be the following:
[SEE FIGURE IN ORIGINAL]
The stricter standard of review means that loyalty is more likely to lead to [*1298] liability than care. Objectivity
is judged by an intermediate standard of review and therefore falls between the two. Finally, good faith and rationality
are judged under extremely deferential standards of review and therefore are very unlikely to lead to liability.
If we factor in the likelihood of exculpation, however, the sequence would change significantly. It might look as
follows:
[SEE FIGURE IN ORIGINAL]
Loyalty is most likely to lead to liability, while care - which is exculpable - is least likely to do so. Good faith may
also lead to liability, but is less likely to do so than loyalty because of the burden that the plaintiffs must bear. Finally,
 Page 28
83 S. Cal. L. Rev. 1231, *

if, as I have argued, objectivity is exculpable and rationality is not, then rationality is more likely to lead to liability than
objectivity - even though it is very unlikely to do so.
[SEE FIGURE IN ORIGINAL]
The lightest burden is associated with the duty of loyalty, where the shareholders must prove only a situation rising
to the level of self-dealing. The greatest burden is under rationality, where the shareholders must prove that the sub-
stance of a decision is so bad as to be utterly irrational and amount to waste. In between the two is care, where the
shareholders must establish gross negligence. Objectivity is more demanding than loyalty because the shareholders must
establish not only a situation involving bias, but also unreasonableness. And good faith is less demanding than rational-
ity because intentional misconduct is more likely than utterly irrational behavior.
In my proposed approach, each closed curve represents not particular conduct, circumstances, or cases, but rather a
particular aspect of, or concern with respect to, fiduciary duties. Ultimately, there is one fundamental fiduciary duty - to
pursue the interests of the corporation and its shareholders - but that core duty can be divided into at least five different
concerns. Directors should make good substantive decisions for shareholders.
Thus, the appropriate way to think about fiduciary duties is not that certain conduct will fall within certain duties;
there just happens to be a nice fit in many cases.
The current debate about the number of fiduciary duties essentially revolves around the question of which level of
abstraction, the second or the third, is the appropriate default level for discussions of fiduciary duties. I argue that the
answer does not truly matter as long as the complexity of the law - especially the five paradigms for enforcement - is
preserved. I also argue, however, that the third level of abstraction is superior because it is much more descriptive with-
out being overly complex. Moreover, the conclusion that there are two fiduciary duties may lead to a dangerous over-
simplification of the law. Thus, the best answer to the question - How many fiduciary duties are there in corporate law?
- is that there are five: in addition to care, loyalty, and good faith, there are objectivity and rationality.
Furthermore, fiduciary duties cannot be described adequately in simple terms. The law is too complex, and there is
too much overlap among fiduciary duties to permit this. Thus, fiduciary duties should be conceptualized not as a linear
continuum, but as occupying a two-dimensional area, much like a Venn diagram. Each fiduciary duty represents not
particular conduct on the part of directors, but rather an aspect of the one fiduciary duty that concerns the shareholders.
Thus, every action by a director implicates every fiduciary duty and theoretically can violate any or all of them depend-
ing on the circumstances and the evidence that the shareholders are able to offer. This approach gives real significance
to the notion that there is one fundamental fiduciary duty while preserving the richness and nuance of the law.
V. A UNIFIED STANDARD OF REVIEW?

It is commonly thought that breaches of the duty of care are reviewed under the business judgment rule while breaches
of the duty of loyalty are reviewed under the entire fairness test. This is not how it works in [*1306] Delaware; at
least not since 1993. In that year, the Delaware Supreme Court announced a unified test for the review of breach of fidu-
ciary duty. Now, both the business judgment rule and the entire fairness test are applicable to each and every claim of
breach of fiduciary duty.
In this part, I consider how my approach to fiduciary duties would work in Delaware. In Section A, I describe and
distinguish the two models for the relationship between the business judgment rule and the entire fairness test. In Sec-
tion B, I demonstrate that the Delaware model is inherently problematic, but that my five-duty approach works at least
as well as Delaware's own approach. In Section C, I describe how my approach would work under the more traditional
model. I also argue that the traditional model is superior and that Delaware should abandon its unified test.
A. Two Models

There are two possible models for the relationship between the business judgment rule and the entire fairness test. The
first, which I call the "Traditional Model," is the relationship that they had before 1993, and that they still have in many
people's minds. The second, which I call the "Delaware Model," is the relationship that was developed in the case of
Cede & Co.
Figure 2. The Delaware Model with Five Fiduciary Duties
[SEE FIGURE 2 IN ORIGINAL]
 Page 29
83 S. Cal. L. Rev. 1231, *

Compare Delaware's own approach. Under Stone, the three filters contemplated by Cede & Co. remain intact.
There is no neat correlation between filters and fiduciary duties, however. Rather, the presumption of the business judg-
ment rule is rebuttable in two ways with respect to the duty of loyalty and in a third way with respect to the duty of care.
This may not be especially complex, but it is unnecessarily so.
More importantly, the duty of objectivity, structural bias, and the intermediate standards of review are not ac-
counted for. Under Unocal, enhanced scrutiny cannot be described as a filter between the business judgment rule and
the entire fairness test. Rather, it is characterized as a "threshold" inquiry, "before the protections of the business judg-
ment rule may be conferred."
Figure 3. Unocal's Enhanced Scrutiny
[SEE FIGURE 3 IN ORIGINAL]
In order to fit Unocal's enhanced scrutiny under the Delaware Model, the courts must abandon the notion that it is a
threshold inquiry. Viewed as just another filter providing an intermediate level of review, enhanced scrutiny can fit in
nicely within the Delaware Model. It could be depicted in the following manner:
[*1311]
Figure 4. The Delaware Model with Four Fiduciary Duties
[SEE FIGURE 4 IN ORIGINAL]
This approach, however, is essentially the same as mine. All that remains to be accounted for is the duty of rational-
ity. It is possible to say that substance lies outside of the unified framework altogether. Because the shareholders must
prove waste, however, it seems more accurate to describe rationality as yet another way to rebut the presumption of the
business judgment rule. In other words, it is a fifth filter.
In the end, both the Delaware approach and my own can be fit within the Delaware Model. Mine fits a little more
neatly, however. Moreover, the Delaware approach fits only to the extent that it is altered to resemble mine.
Taking a closer look at the Delaware Model complicates matters. As many commentators have noted, applying the
entire fairness test outside of an interested transaction context is theoretically difficult.
Despite the inherent limitations of the entire fairness test, my approach can accommodate the Delaware Model as
well as any other. All that is necessary is that one understand that fairness can mean different things in different con-
texts. Consider, for example, the duty of care. A fairness inquiry is a bit complicated: it would be odd to conclude that a
grossly negligent decision is entirely fair.
Figure 5. The Traditional Model with Five Fiduciary Duties

#=K</lnvxe:fnrmungo> n345
In short, my approach and its five-fiduciary-duty framework can exist within the Delaware Model. Litigation can
begin with the presumption of the business judgment rule. The shareholders would have the burden of rebutting that
presumption with respect to the five fiduciary duties which are based on the five paradigms for enforcement. Once they
have rebutted the presumption of the business judgment rule, the burden would shift to the directors to establish fair-
ness, the exact meaning of which would depend on the circumstances. If the directors fail to do so, the court can award
an appropriate remedy.
C. Five Fiduciary Duties Under the Traditional Model

Although my approach works reasonably well within the Delaware Model, it works even better within the Traditional
Model. Under the Traditional Model, each of the fiduciary duties would represent one of the five paradigms for enforce-
ment of the one fiduciary duty. There would be five distinct standards of review, with no effort to unify them under a
grand theory. Rather, each test would be tailor-made for the circumstances. My approach under the Traditional Model
can be pictured as follows:
n344
Thus, there is no problem here. Damages can be awarded when appropriate; other cases could be n343 That is
certainly true. Nevertheless, it is clear in Delaware that the courts have broad discretion in deciding on an appropriate
remedy after a fairness inquiry. They may award any equitable or monetary relief, as appropriate. n342 Understood in this
way, it is reasonably workable.
 Page 30
83 S. Cal. L. Rev. 1231, *

Finally, there is the issue of remedies. Many commentators have criticized the Delaware Model with respect to
remedies. They argue that rescission or rescissory damages, which is the usual remedy, is often inappropriate in nonloy-
alty contexts. n341
In other words, under the Delaware Model, the fairness inquiry is not exactly an application of the entire fairness
test or the second paradigm for enforcement. Rather, it is a method to shift the burden of proof onto the directors after
the shareholders have rebutted the presumption of the business judgment rule. n340 Especially because the situation is al-
most entirely hypothetical, there is no need for a per se rule. Directors could be given the opportunity to show fairness -
which would translate into something at least as demanding as a compelling justification - even if it is unlikely that they
will be able to do so. n339 If directors had a compelling justification for their intentional misconduct, then perhaps they
can survive the fairness inquiry.
The duty of rationality truly tests the limits of fairness as a universal test. The issue becomes whether an utterly ir-
rational decision that amounts to waste can be considered fair. On the one hand, it is almost impossible to imagine how
such a test can be satisfied. On the other hand, it is also very difficult to imagine how the shareholders could establish
irrationality or waste in the first place. n338 A compelling justification for an intent to harm may be difficult to imagine,
but a compelling justification for conduct that is merely deemed misconduct is easier to imagine. n337 For example, it
would cover an intentional violation of law or an intent to thwart a shareholder vote. Such behavior is deemed miscon-
duct, but it does not necessarily stem from malice. It may be justifiable or excusable if directors n336 It may seem hard
to imagine circumstances that satisfy such a test, but there are at least two possibilities. The first situation is where, de-
spite intentional misconduct, there was no harm suffered by the shareholders. For example, despite being malicious, the
directors failed and were unable to harm the shareholders. Perhaps directors should be held accountable anyway, but
that is not obviously the case. The second situation is where there was no malice. This is possible because good faith
covers more than intent to harm; it covers any intentional conduct that the law deems misconduct. n335 This is not too
difficult to rationalize. Gross negligence would not necessarily lead to a bad result; it is merely more likely to do so.
Despite a deficient process, the end result may be fine - if only by luck. In a sense, the fairness inquiry becomes a proxy
for the issue of damages: if the shareholders have been harmed, then the directors will not be able to show fairness,
while if the shareholders have not been harmed in any way, then perhaps the directors can.
The fairness inquiry is trickier in cases involving the duty of good faith. The issue becomes whether, despite inten-
tional misconduct, it would be fair not to hold directors liable. n334 Nevertheless, the inquiry can be whether, despite the
gross negligence, the result remains fair to the shareholders. n333 Not all director conduct that may constitute a breach of
fiduciary duty can be characterized as a discrete transaction. Sometimes, the breach is simply inaction. While it may be
simple to classify transactions as fair or unfair, it is more difficult to do so with less discrete actions or inaction.
Such problems, however, are inherent to the unified approach of the Delaware Model. They stem from the fact that
the entire fairness test was never designed to be a universal test. It was intended for one particular context: the duty of
loyalty, or the second paradigm for enforcement of n332 This simply does not make sense within the framework of the
Delaware Model. It reflects the fact that Unocal was decided before Cede & Co. The Delaware Model did not yet exist,
and n331 In order to rebut the presumption with respect to the duty of care, the shareholders must establish gross negli-
gence. In order to rebut the presumption with respect to the duty of loyalty, the shareholders must establish self-dealing.
In order to rebut the presumption with respect to good faith, the shareholders must establish intentional misconduct.
Thus, the Delaware Model may be visualized as follows:
Figure 1. The Delaware Model

[SEE FIGURE 1 IN ORIGINAL]

Even at this superficial level, my approach fits in more neatly than does Delaware's own approach, as embodied in
Stone and Unocal. With appropriate caveats, I claim that there are five fiduciary duties. This approach can easily ac-
commodate the Delaware Model. All that is required is having five filters instead of three in between the business judg-
ment rule and the entire fairness test. There would be one filter for each fiduciary n330 In fact, since Cede & Co., there
has not been a single duty of care case in Delaware in which the presumption of the business judgment rule was rebutted
and the entire fairness test was applied. Thus, for practical purposes, the Traditional Model is a fair, if not entirely accu-
rate, description of Delaware law.
Beyond this superficial level, however, the distinction becomes increasingly important. For example, in cases
where the difference matters, it can be significant. Moreover, as the number of fiduciary duties increases from two to
 Page 31
83 S. Cal. L. Rev. 1231, *

five, it becomes less fair to say that the Traditional Model and the Delaware Model are functionally equivalent. In the
remaining sections, I will consider the ramifications of the two models for my approach to fiduciary duties.
B. Five Fiduciary Duties Under the Delaware Model

My approach to fiduciary duties is compatible with the Delaware n329 and litigation focuses on the entire fairness test.
In duty of care cases, the presumption of the business judgment rule is rarely rebutted, so the entire fairness test never
comes into play. n328 Moreover, because it is rare for a shareholder to overcome the presumption of the business judg-
ment rule in a duty of care case, the Delaware courts have not had many opportunities to apply the Delaware Model af-
ter Cede & Co. Thus, it is not clear that the Delaware Model is settled law in Delaware.
In most cases, there is not much practical difference between the Delaware Model and the Traditional Model. In
duty of loyalty cases, the presumption of the business judgment rule is easily rebutted by a self-dealing transaction,
without more, n327 but also from Delaware judges writing extrajudicially. n326
Under the Traditional Model, the business judgment rule and the entire fairness test are independent of each other.
They are two distinct standards of review. Cases involving duty of care claims are evaluated under the business judg-
ment rule, while cases involving duty of loyalty claims are evaluated under the entire fairness test. Under the Delaware
Model, the business judgment rule and the entire fairness test are intimately related. Together, they form a unified stand-
ard of review. Every case involving a fiduciary duty claim begins with the business judgment rule and ends with the
entire fairness test. The business judgment rule provides a presumption that the directors have satisfied their fiduciary
duties. If the shareholders rebut this presumption, the directors bear the burden of proving that the transaction was fair.
This is true not only of duty of loyalty claims, but also of duty of care claims.
At the present time, the Delaware Model appears to be the law of Delaware. The Delaware Model has been the sub-
ject of much criticism, n325 To the extent that a failure to monitor reflects carelessness, it remains exculpable. If the fail-
ure to monitor reflects intentional misconduct, however, it also violates a duty of good faith and is not exculpable. This
approach does not entail judicial activism. It fully respects both the letter and the spirit of the exculpation statute.
In short, the law of fiduciary duties is inherently complex. Fiduciary duties should not be forced into simplistic
frameworks. Rather, the richness of the relationships among them should be acknowledged and respected. The various
fiduciary duties represent different aspects of the one fundamental fiduciary duty. Thus, although they are independent
of each other, they are also necessarily related and overlap with one another. Nevertheless, each of the fiduciary duties
at the third level of abstraction, and each of the five paradigms for enforcement, has an important role in the law of fidu-
ciary duties.
H. Summary

This part addresses how fiduciary duties ought to be understood. The most important insight is that fiduciary duties can
be viewed at varying n324 Understood in this way, Stone becomes an example of inappropriate judicial activism. My
approach, on the other hand, makes better sense of the holding. The duty to monitor is not a fiduciary duty at the third
level of abstraction; it is only conduct. As such, a failure to monitor is capable of violating any of the fiduciary duties,
depending on the circumstances. The Delaware statute does not permit exculpation of the duty to monitor, but only of
the duty of care. n323 For Stone to reposition the duty to monitor under the duty of loyalty (via the duty of good faith) was
not only surprising, but also disturbing. Essentially, the court converted a duty of care claim, which the legislature had
determined should be exculpable, into a duty of loyalty issue, which is not. n322 duties than does Stone. Despite what the
Delaware Supreme Court suggests, the Caremark duty to monitor seems rather obviously to be a component of the duty
of care. n321 This is theoretically troubling. It might be fine to suggest that the law is more concerned about certain fiduci-
ary duties than others, but it seems unacceptable to suggest that the law is indifferent to something that it considers a
fiduciary duty. However, if there is only one fiduciary duty and what are commonly called fiduciary duties reflect dif-
ferent aspects of that one duty and the type of evidence that can be offered in support of a claim of breach, then exculpa-
tion is less problematic. Exculpation does not suggest that the law is indifferent to anything. Rather, it only reflects the
judgment that the remedies available to the shareholders should vary depending on the concern at hand and the available
evidence. Far from being problematic, this seems eminently sensible.
In addition, this approach to fiduciary duties does a better job of n320 Rather it is the concern being pursued by the
shareholders that determines which duty is litigated. Once director conduct has been called into question, the concern
must be identified: Was the conduct intentional? Was it careless? Was it biased? Was it conflicted? Or was it so bad that
 Page 32
83 S. Cal. L. Rev. 1231, *

liability should follow? Ultimately, the one fundamental fiduciary duty is involved. The individual fiduciary duties are
simply different ways of determining whether there was a breach.
This approach to fiduciary duties helps to explain two matters that are somewhat problematic under more conven-
tional approaches. The first is exculpation. The exculpability of some fiduciary duties and not others suggests that the
law is indifferent to certain fiduciary duties. n319 This is not the case, however. At a very low level of abstraction, disclo-
sure might be characterized as a fiduciary duty, but not at the second or third levels. Rather, at higher levels of abstrac-
tion, disclosure constitutes conduct that is subject to each of the fiduciary duties. Thus, inadequate disclosure can be a
breach of any or all of the duties, depending on the circumstances. Assume, for example, that directors knowingly com-
mission a faulty study in order to justify a false disclosure that will benefit them substantially. The most obvious viola-
tion is the duty of good faith, because there was dishonesty that was intentional. There is also a violation of the duty of
loyalty, n318 One might argue that this suggests that disclosure is actually a separate duty, much like good faith. n317
Another example would be the duty of disclosure. As discussed earlier, this duty has been characterized as part of
all three court-recognized fiduciary duties. n316 How should this conduct be reviewed? The first thought would be to turn
to the duty of objectivity for the appropriate standard of review. This is a good assumption. However, the directors' ac-
tions can violate any or all of the fiduciary duties. For example, assume further that the directors, for the sole purpose of
preserving their jobs, specifically adopt the new poison pill in order to block a transaction that they know would be
much better for shareholders. These directors clearly have violated the duty of objectivity by not reasonably overcoming
their bias - but they also have violated the duty of rationality by knowingly making a very bad decision, the duty of care
by not implementing a process intended to lead to a good decision, the duty of loyalty by not being entirely fair in the
face of a conflict, and the duty of good faith by engaging in intentional misconduct. They have violated all five duties at
once! The theory or theories that the shareholders will pursue in court will depend on the evidence they can offer. In this
situation, the easiest standard for the shareholders to meet seems to be reasonableness: the situation is one involving
structural bias, so they have to prove only that the transaction was unreasonable. If they have enough evidence - for ex-
ample, a record of a meeting where directors admitted to misconduct - they can pursue other theories as well. In real
life, however, it is not easy to prove violations of most fiduciary duties. Fortunately, a shareholder can prevail by prov-
ing breach of any one duty. n315
In a sense, fiduciary duties are based not on the directors' conduct but on the shareholders' concerns. Any particular
conduct can fall within the ambit of any or all of the fiduciary duties depending on the circumstances that are relevant to
the litigation. For example, assume a hostile takeover n314 This is true not only at the second level of abstraction, where
there are two duties, but also at the third level, where there are five. n313
The ramifications of this should be clear: every action by a director implicates each of the various fiduciary duties.
Strine recognizes this fact. He acknowledges that "every act in every context implicates the duty of loyalty" and "every
act by a director implicates the duty of care." n312 Directors should employ a good decisionmaking process. Directors also
should avoid obstacles to the decisionmaking process, such as bias and conflicts. And, of course, directors should avoid
intentional misconduct. In other words, the duty of care represents the concern that the directors pursue the interests of
the corporation and its shareholders carefully; the duty of loyalty represents the concern that they do so loyally (without
conflicts); the duty of objectivity represents the concern that they do so reasonably (despite bias); the duty of good faith
represents the concern that they do so honestly (without misconduct); and the duty of rationality represents the concern
that they do so rationally (without waste). n311 There are five intersecting closed curves, each with their own realm but
which intersect each other as well. This model highlights at least two important characteristics of fiduciary duties. First
is the fact that they are capable of relating to each other in many different ways. Second is the fact that there n310
In short, there are many different ways of organizing fiduciary duties. The sequence varies greatly depending on
whether they are organized based on likelihood of liability, culpability, or burdens of proof. Moreover, other criteria
could be imagined. Each possibility reveals different relationships among the various fiduciary duties. Thus, adopting
one linear framework as the definitive model does not do the law justice. Various frameworks can be equally valid even
though they lead to conflicting results. What is needed is a more robust model for conceptualizing fiduciary duties. In
the next section, I propose such a model.
G. Every Action Implicates Every Fiduciary Duty

In the previous section, I demonstrated that the relationship among the various fiduciary duties is complex and cannot
be represented adequately on a single linear continuum. I now suggest that the best way to understand fiduciary duties is
to visualize them as Venn diagrams. n309 Next is the duty of loyalty. The directors must establish that the transaction was
 Page 33
83 S. Cal. L. Rev. 1231, *

not only fair to the corporation and its shareholders, but also "entirely" or "intrinsically" fair, both as to process and sub-
stance. Last is the duty of objectivity. The directors must convince the court that their conduct was not unreasonable. n308
The burden under the duty of good faith would be almost as bad. Once the shareholders have established intentional
misconduct, the directors would have the opportunity to show a compelling justification. This would be extremely diffi-
cult, but not necessarily impossible. n307:
[SEE FIGURE IN ORIGINAL]
Rationality would seem to be the most demanding because, once the shareholders have established that a decision
was utterly irrational and amounted to waste, there would seem to be nothing left to do but to argue the extent of dam-
ages. The same is true for care, but it might be easier to establish a lack of damages resulting from gross negligence than
from n306
Likewise, fiduciary duties may be organized based on the subsequent burden on the directors. The sequence might
be as follows n305 and objectivity - biased action - lies somewhere between the two.
n304
Loyalty involves conduct - conflicted action - that is more culpable than care, n303
Likelihood of liability is only one possible way of organizing fiduciary duties on a continuum. Another possibility
is the culpability of the conduct covered by the duty. Based on this criterion, the sequence should be the following:
[SEE FIGURE IN ORIGINAL]
Clearly, intentional misconduct is the most culpable form of behavior. Rationality - or making a bad substantive
decision - is the least culpable.
Duty of loyalty claims would be reviewed under the second paradigm, or the entire fairness test. The shareholders
would have to show only a conflict that rises to the level of self-dealing, and the burden would then shift to the directors
to show that the transaction was entirely fair. n348 If the directors cannot establish fairness, then the court would be free to
award any appropriate remedy. n349 Presumably, an award of damages would be appropriate only to the extent that an
injury could be shown. Otherwise, the remedy would be limited to injunctive relief or, perhaps, nominal damages.
Duty of objectivity claims would be evaluated under the third paradigm, or the reasonableness test. This paradigm
is less straightforward [*1316] than the others. n350 In my opinion, the shareholders should bear the burden of estab-
lishing both a situation involving structural bias and an unreasonable decision on the part of directors. n351 If they can do
that, they would be entitled to any damages they can prove, n352 or any other appropriate equitable relief.
Duty of good faith claims would be evaluated under the fourth paradigm, or an intent test. The shareholders would
bear the heavy burden of establishing intentional misconduct. n353 If they meet this burden, the directors would bear the
commensurately heavy burden of establishing a compelling justification. n354 If the directors fail to meet that burden, the
shareholders would be entitled to damages for any injury that is established, or some other equitable relief.
Finally, the duty of rationality would be evaluated under the fifth paradigm, or the waste test. The shareholders
would bear the extremely heavy burden of establishing that the director's conduct was utterly irrational and amounted to
waste. n355 If they can do that, then a damages award would seem to be appropriate to the extent of the waste.
The practical difference between the Traditional Model and the Delaware Model is relatively small. In each case, as
in litigation generally, there is a presumption that the defendant is "innocent" and there is a burden on the plaintiff to
prove otherwise. If the plaintiff meets this burden then, to some extent or other, the burden shifts to the defendant. Even
though the burden technically remains with the shareholders under the Traditional Model, the difference from the Dela-
ware Model is not all that great. This is because the standard is a preponderance of the evidence, or more likely than not.
n356
The directors must treat this as if the burden were on themselves in any event.
Yet, despite their similarities, the Traditional Model is superior to the Delaware Model. It is simpler, cleaner, and
more sensible. The Delaware Model is awkward and at times seems forced. The Delaware Model might be preferable to
the Traditional Model if there were countervailing benefits, [*1317] but I fail to see any. As a practical matter, the
unified test of the Delaware Model does not offer the benefit of simplicity. Where the Traditional Model offers a choice
of five standards of review, the Delaware Model offers five filters surrounded by both the business judgment rule and
the entire fairness test. If anything, the Delaware Model is more complicated. Moreover, as a theoretical matter, the uni-
fied test of the Delaware Model offers few advantages. Any benefit from a unified approach is outweighed by the intel-
lectual awkwardness of trying to fit disparate concepts into a single mold.
 Page 34
83 S. Cal. L. Rev. 1231, *

I have argued throughout this paper that the question - How many fiduciary duties are there in corporate law? - is
not an appropriate question. I also have argued that, if the question must be asked, then the best answer is five. For simi-
lar reasons, I believe that the question - How many tests are there for breach of fiduciary duty in corporate law? - is an
unnecessary question. As long as the five paradigms for the enforcement of fiduciary duties are preserved, the answer to
either question is irrelevant. Nevertheless, practical considerations suggest that, once again, the best answer is five.
Thus, I propose that Delaware courts abandon the unified test of Cede & Co. and return to a more traditional model.
Each fiduciary duty should be covered by its own standard(s) of review. There is no need to unify these very different
tests.
VI. CONCLUSION

The current debate on the number of fiduciary duties in corporate law focuses on whether there should be two or three.
Ultimately, it boils down to a question of whether good faith should be considered a separate and independent duty or a
part of the duty of loyalty. Everyone agrees that, in substance, there is and should be what may colloquially be consid-
ered a duty of good faith. Thus, the debate is almost entirely academic, with little practical significance.
I argue that a better answer would be that there are five fiduciary duties. Of course, my answer is also somewhat
academic and is not uniquely correct. In demonstrating why this is so, however, I hope to have shed light on the nature
of fiduciary duties. My approach provides a robust framework for the discussion, application, and development of the
law of fiduciary duties. In addition, I have shown why the debate matters from a practical standpoint. The urge to sim-
plify creates a risk of oversimplification. Thus, the most promising approach to fiduciary duties [*1318] is to focus
on the paradigms for enforcement.

Legal Topics:

For related research and practice materials, see the following legal topics:
Business & Corporate LawCorporationsDirectors & OfficersManagement Duties & LiabilitiesDefensesBusiness Judg-
ment RuleEnvironmental LawLitigation & Administrative ProceedingsToxic TortsGovernmentsFiduciary Responsibili-
ties

FOOTNOTES:

n1. I am limiting the discussion to directors in order to avoid the possibly thorny issue of the extent to which fiduciary duties and the busi-
ness judgment rule apply to corporate officers. See Gantler v. Stephens, 965 A.2d 695, 708-09 & n.37 (Del. 2009) (holding that officers have
the same fiduciary duties as directors, but noting that the consequences are not necessarily the same). Compare Lyman P.Q. Johnson, Corpo-
rate Officers and the Business Judgment Rule, 60 Bus. Law. 439 (2005) (arguing why, according to agency theory, the protection of the
business judgment rule should not extend to corporate officers), and Lyman P.Q. Johnson & David Millon, Recalling Why Corporate Offic-
ers Are Fiduciaries, 46 Wm. & Mary L. Rev. 1597 (2005) (discussing the application of agency theory to officer-director relationships to
establish appropriate fiduciary duties for officers that are different from those of directors), with Gregory Scott Crespi, Should the Business
Judgment Rule Apply to Corporate Officers, and Does It Matter?, 31 Okla. City U. L. Rev. 237 (2006) (arguing that the protection of the
business judgment rule should be extended to officers in derivative shareholder lawsuits opposed by the board but not in claims initiated by
the board or supported by the board), and Lawrence A. Hamermesh & A. Gilchrist Sparks III, Corporate Officers and the Business Judgment
Rule: A Reply to Professor Johnson, 60 Bus. Law. 865 (2005) (arguing that the protection of the business judgment rule should apply with
equal force to both officers and directors).

n2. Smith v. Van Gorkom, 488 A.2d 858, 872-73, 893 (Del. 1985) (holding directors liable for breach of the duty of care), overruled on
other grounds by Gantler v. Stephens, 965 A.2d 695, 713 n.54 (Del. 2009).

n3. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182, 184 (Del. 1986) (holding that, in situations where a
break up of the company or a change of control becomes inevitable, directors have a duty to maximize shareholder value); Unocal Corp. v.
Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (holding that directors' actions to resist a hostile takeover will be upheld only if there
are reasonable grounds to believe that the offer poses a threat and the response is reasonable in relation to the threat); Zapata Corp. v. Maldo-
nado, 430 A.2d 779, 788-89 (Del. 1981) (holding that a motion to dismiss shareholder litigation made by a committee of the board of direc-
tors will be upheld only if the independence and good faith of the committee are established and the motion comports to the court's inde-
pendent business judgment).
 Page 35
83 S. Cal. L. Rev. 1231, *

n4. Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993).

n5. Id. at 361.

n6. In re The Walt Disney Co. Derivative Litig., 906 A.2d 27, 62-68 (Del. 2006) (outlining the concept of good faith); In re The Walt Dis-
ney Co. Derivative Litig., 907 A.2d 693, 755-56 (Del. Ch. 2005) (holding that the plaintiff can establish lack of good faith on the part of a
director by proving "intentional dereliction of duty" or "conscious disregard for one's responsibilities"), aff'd, Disney, 906 A.2d 27.

n7. There are other ways in which Delaware complicated the law of fiduciary duties as well. For example, the Delaware Supreme Court has
decided that director exculpation charter provisions should be interpreted as an affirmative defense rather than as a bar to liability. See Emer-
ald Partners v. Berlin, 726 A.2d 1215, 1223-24 (Del. 1999). Such complications are not directly relevant to this paper.

n8. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del. 2006).

n9. See Julian Velasco, The Enduring Illegitimacy of the Poison Pill, 27 J. Corp. L. 381, 423 (2002).

n10. A paradigm for enforcement is somewhat different from a standard of review. It is an approach to judicial review and may comprise a
number of related tests. These five paradigms are described in detail in Part II.

n11. The labels care, loyalty, and good faith are familiar to corporate law. I have taken the liberty of naming the two additional duties "ob-
jectivity" and "rationality."

n12. See Melvin A. Eisenberg, The Duty of Good Faith in Corporate Law, 31 Del. J. Corp. L. 1 (2006); Leo E. Strine, Jr. et al., Loyalty's
Core Demand: The Defining Role of Good Faith in Corporation Law, 98 Geo. L.J. 629 (2010). For additional work on the duty of good faith,
see, for example, Stephen M. Bainbridge, Star Lopez & Benjamin Oklan, The Convergence of Good Faith and Oversight, 55 UCLA L. Rev.
559 (2008); Carter G. Bishop, Directorial Abdication and the Taxonomic Role of Good Faith in Delaware Corporate Law, 2007 Mich. St. L.
Rev. 905 (2007); Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law, 41
Wake Forest L. Rev. 1131 (2006); Elizabeth A. Nowicki, Not in Good Faith, 60 SMU L. Rev. 441 (2007); David Rosenberg, Making Sense
of Good Faith in Delaware Corporate Fiduciary Law: A Contractarian Approach, 29 Del. J. Corp. L. 491 (2004); Hillary A. Sale, Delaware's
Good Faith, 89 Cornell L. Rev. 456 (2004); Hillary A. Sale, Monitoring Caremark's Good Faith, 32 Del. J. Corp. L. 719 (2007).

n13. See Claire A. Hill & Brett H. McDonnell, Stone v. Ritter and the Expanding Duty of Loyalty, 76 Fordham L. Rev. 1769, 1788-91
(2007).

n14. I use the term "decisionmaking process" in the broadest sense possible. It includes the process related to all board endeavors, whether
in the nature of management or monitoring.

n15. Graham ex rel. S'holders of Allis-Chalmers Mfg. Co. v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963). See also Model
Bus. Corp. Act § 8.30(b) (2005) ("The members of the board of directors ... shall discharge their duties with the care that a person in a like
position would reasonably believe appropriate under similar circumstances.").
 Page 36
83 S. Cal. L. Rev. 1231, *

n16. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).

n17. Id.

n18. Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989) (internal quotation marks omitted).

n19. See Julian Velasco, Structural Bias and the Need for Substantive Review, 82 Wash. U. L.Q. 821, 828-29 (2004). Cf. Stephen M. Bain-
bridge, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L. Rev. 83, 89-90 (2004) (arguing that the business judgement rule
is best understood as an "abstention doctrine" that creates a presumption against duty of care claims).

n20. See Model Bus. Corp. Act § 8.31 official cmt.; Melvin Aron Eisenberg, The Divergence of Standards of Conduct and Standards of
Review in Corporate Law, 62 Fordham L. Rev. 437 (1993).

n21. Aronson, 473 A.2d at 812.

n22. See Edward Rock & Michael Wachter, Dangerous Liaisons: Corporate Law, Trust Law, and Interdoctrinal Legal Transplants, 96 Nw.
U. L. Rev. 651, 658 n.56 (2002) ("It has long been debated whether there is a difference between "negligence' and "gross negligence.'").

n23. See Black's Law Dictionary 1134 (9th ed. 2009) (defining "gross negligence").

n24. For a more thorough discussion, see Velasco, supra note 19, at 830-34.

n25. Del. Code Ann. tit. 8, § 141(a) (2010).

n26. See Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) ("The business judgment rule exists to protect and promote the full and free
exercise of the managerial power granted to Delaware directors."), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695, 713
n.54 (Del. 2009).

n27. See Joy v. North, 692 F.2d 880, 886 (2d Cir. 1982) ("Courts recognize that after-the-fact litigation is a most imperfect device to evalu-
ate corporate business decisions."); Auerbach v. Bennett, 393 N.E.2d 994, 1000 (N.Y. 1979) ("The business judgment doctrine, at least in
part, is grounded in the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essen-
tially business judgments.").

n28. Velasco, supra note 19, at 834.

n29. Id.

n30. Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). For another classic statement, see Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y.
1928) (discussing the fiduciary duty of loyalty among partners).
 Page 37
83 S. Cal. L. Rev. 1231, *

n31. See Eisenberg, supra note 20, at 451 (stating that "the standard of review is the same as the standard of conduct").

n32. See generally Harold Marsh, Jr., Are Directors Trustees? Conflict of Interest and Corporate Morality, 22 Bus. Law. 35 (1966) (dis-
cussing the history of legal treatment of conflicts under duty of loyalty).

n33. See Del. Code Ann. tit. 8, § 144 (2010); Model Bus. Corp. Act § 8.61 (2005); Fliegler v. Lawrence, 361 A.2d 218, 222 (Del. 1976)
("We do not read the statute as providing ... broad immunity ... . It merely removes an "interested director' cloud when its terms are met ... .
Nothing in the statute sanctions unfairness ... or removes the transaction from judicial scrutiny.").

n34. See, e.g., Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987) ("Approval by fully-informed disinterested directors under section
144(a)(1), or disinterested stockholders under section 144(a)(2), permits invocation of the business judgment rule and limits judicial review
to issues of gift or waste with the burden of proof upon the party attacking the transaction."); In re The Walt Disney Co. Derivative Litig.,
731 A.2d 342, 368 (Del. Ch. 1998) ("Our courts have treated fully informed shareholder ratification under § 144(a)(2) as validating the
transaction and removing it from the purview of entire fairness review. The business judgment rule applies to the ratified transaction ... ."
(footnote omitted)), aff'd in part, rev'd in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
To be fair, there is an additional layer of complexity when a controlling shareholder is involved. See Kahn v. Lynch Commc'n Sys.,
Inc., 638 A.2d 1110, 1117 (Del. 1994) ("An approval of the transaction by an independent committee of directors or an informed majority of
minority shareholders shifts the burden of proof on the issue of fairness ... ."). I have not included this in the discussion in the text for two
reasons. First, although it complicates the discussion, it does not change much. As I have made clear, a paradigm for enforcement can in-
clude multiple standards of review. Second, I believe the situation involves structural bias-type concerns and might be better placed in the
third paradigm for enforcement. See Velasco, supra note 19, at 851-53.

n35. Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983) (citations omitted).

n36. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del. 1989) (quoting AC Acquisitions Corp. v. Anderson, Clayton &
Co., 519 A.2d 103, 111 (Del. Ch. 1986)).

n37. See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) ("An initial judicial determination that a given breach of a
board's fiduciary duties has rebutted the presumption of the business judgment rule does not preclude a subsequent judicial determination
that the board action was entirely fair, and is, therefore, not outcome-determinative per se."); Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del.
1993) ("Application of the entire fairness rule does not, however, always implicate liability of the conflicted corporate decisionmaker, nor
does it necessarily render the decision void.").

n38. See Cinerama, 663 A.2d at 1179 ("A finding of perfection is not a sine qua non in an entire fairness analysis."); Weinberger, 457 A.2d
at 709 n.7 (stating that "perfection is not possible, or expected").

n39. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993) (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled
on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000)). See also Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)
("A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. This alone will not evoke the intrin-
sic fairness standard, however. This standard will be applied only when the fiduciary duty is accompanied by self-dealing....").

n40. Cede & Co., 634 A.2d at 362. See also Sinclair, 280 A.2d at 720 ("The basic situation for the application of the rule is the one in
which the parent has received a benefit to the exclusion and at the expense of the subsidiary.").
 Page 38
83 S. Cal. L. Rev. 1231, *

n41. This is a species of structural bias. See Velasco, supra note 19, at 856-57.

n42. In Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, the Delaware Supreme Court considered the issue in the context
of a demand futility claim and stated the following:

A variety of motivations, including friendship, may influence the demand futility inquiry. But, to render a director unable to consider de-
mand, a relationship must be of a bias-producing nature... . Not all friendships, or even most of them, rise to this level and the Court cannot
make a reasonable inference that a particular friendship does so without specific factual allegations to support such a conclusion.

Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (quoting Beam ex rel. Martha Stewart
Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 979 (Del. Ch. 2003) (footnote omitted)). The facts of the case demonstrate that the quan-
tum of proof required by the court is quite high:

Allegations that Stewart and the other directors moved in the same social circles, attended the same weddings, developed business relation-
ships before joining the board, and described each other as "friends,' even when coupled with Stewart's 94% voting power, are insufficient,
without more, to rebut the presumption of independence. They do not provide a sufficient basis from which reasonably to infer that [the
directors in question] may have been beholden to Stewart.

Id. at 1051. On the other hand, the courts have at times accepted claims of bias in much more marginal situations. See, e.g., In re Oracle
Corp. Derivative Litig., 824 A.2d 917, 920-21 (Del. Ch. 2003) (denying a special litigation committee's motion to terminate a derivative
lawsuit because members of the special litigation committee - two tenured professors at Stanford University - were required to evaluate the
conduct of a fellow professor and two University benefactors).

n43. See Cede & Co., 634 A.2d at 364 ("A trial court must have flexibility in determining whether an officer's or director's interest in a
challenged board-approved transaction is sufficiently material to find the director to have breached his duty of loyalty and to have infected
the board's decision.").

n44. See Am. Gen. Corp. v. Unitrin, Inc. (In re Unitrin, Inc. S'holders Litig.), Nos. 13656, 13699, 1994 Del. Ch. LEXIS 187, at 13 (Del.
Ch. Oct. 13, 1994) ("The board's interest in employing these defensive measures to deflect [a hostile] offer does not rise to the level of a self-
dealing transaction that requires the board to demonstrate entire fairness."), rev'd on other grounds, 651 A.2d 1361 (Del. 1995); City Capital
Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787, 790 n.1 (Del. Ch. 1988).

n45. This is an issue of some debate. See infra notes 152-56 and accompanying text. The second paradigm of judicial enforcement, as I see
it, deals almost exclusively with financial conflicts.

n46. See Velasco, supra note 19, at 835.

n47. See 2 Model Bus. Corp. Act § 8.60 Subchapter F, introductory cmt., at 8-372 (2002) ("The law regulates interest-conflict transactions
because experience shows that people do often yield to the temptation to advance their self-interests and, if they do, other people may be
injured. That contingent fear is sufficient reason to warrant caution and to apply special standards and procedures to interest-conflict transac-
tions."); Franklin A. Gevurtz, Corporation Law 325 (2000) ("The fundamental problem with conflict-of-interest transactions is that we do
not trust individuals with a personal financial stake at odds with the corporation's to put the corporation's interest ahead of their own.");
Gottlieb v. Heyden Chem. Corp., 90 A.2d 660, 663 (Del. 1952) ("Human nature being what it is, the law, in its wisdom, does not presume
that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense.").

n48. See Nixon v. Blackwell, 626 A.2d 1366, 1376 (Del. 1993) ("The entire fairness analysis essentially requires "judicial scrutiny.' In
business judgment rule cases, an essential element is the fact that there has been a business decision made by a disinterested and independent
corporate decisionmaker. When there is no independent corporate decisionmaker, the court may become the objective arbiter." (citations
omitted) (footnote omitted)); AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 111 (Del. Ch. 1986) ("When a transaction
 Page 39
83 S. Cal. L. Rev. 1231, *

is one involving a predominately interested board with a financial interest in the transaction adverse to the corporation ... there is no alterna-
tive to a judicial evaluation of the fairness of the terms of the transaction other than the unacceptable one of leaving shareholders unpro-
tected.").

n49. Velasco, supra note 19, at 824 (footnotes omitted) (quoting James D. Cox, Searching for the Corporation's Voice in Derivative Litiga-
tion: A Critique of Zapata and the ALI Project, 1982 Duke L.J. 959, 962; Melvin A. Eisenberg, The Structure of the Corporation: A Legal
Analysis 145 (1976); and John C. Coffee, Jr. & Donald E. Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for
Legislative Reform, 81 Colum. L. Rev. 261, 283 (1981) (alterations in original)). See also Claire A. Hill & Brett H. McDonnell, Disney,
Good Faith, and Structural Bias, 32 J. Corp. L. 833, 853-54 (2007).

n50. See Velasco, supra note 19, at 914 ("Although structural bias may seem to involve the duty of loyalty, it does not necessarily involve a
breach of the duty of loyalty."). Perhaps it would be more accurate to say that structural bias does not fall within the second paradigm for
enforcement of fiduciary duties. Delaware courts allow for the possibility that friendship might, in an appropriate case, undermine a direc-
tor's independence. In their view, however, that would be a rare case. See cases cited supra note 42. Courts demand specific proof. See Beam
ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051-52 (Del. 2004) ("Mere allegations that they move in the
same business and social circles, or a characterization that they are close friends, is not enough to negate independence ... ."); Aronson v.
Lewis, 473 A.2d 805, 815 n.8 (Del. 1984) ("The difficulty with structural bias ... is simply one of establishing it in the complaint ... . We are
satisfied that discretionary review by the Court of Chancery of complaints alleging specific facts pointing to bias on a particular board will
be sufficient ... ."), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). This language is inconsistent with the
structural bias claim that, in such relationships, bias is inherent. Because structural bias is by definition a subtle influence, the requirement
that the shareholders provide proof is essentially a rejection of the argument. In any event, the requirement that shareholders bear such a
heavy burden of proof is incompatible with the second paradigm that places the burden of proof on the directors.

n51. Velasco, supra note 19, at 844-45.

n52. Id. at 840.

n53. Id. at 841-45.

n54. See id. at 845-52.

n55. A third possibility would be conflicts of interest when a controlling shareholder is involved. See supra note 34.

n56. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).

n57. Id.

n58. Id. at 955.

n59. Id.

n60. See Velasco, supra note 9, at 416-22; Velasco, supra note 19, at 846-47.
 Page 40
83 S. Cal. L. Rev. 1231, *

n61. Zapata Corp. v. Maldonado, 430 A.2d 779, 787 (Del. 1981). In particular:

We must be mindful that directors are passing judgment on fellow directors in the same corporation and fellow directors, in this instance,
who designated them to serve both as directors and committee members. The question naturally arises whether a "there but for the grace of
God go I" empathy might not play a role. And the further question arises whether inquiry as to independence, good faith and reasonable
investigation is sufficient safeguard against abuse, perhaps subconscious abuse.

Id.

n62. Id. at 788. The court justified its decision on the following basis:

We recognize the danger of judicial overreaching but the alternatives seem to us to be outweighed by the fresh view of a judicial outsider.
Moreover, if we failed to balance all the interests involved, we would in the name of practicality and judicial economy foreclose a judicial
decision on the merits. At this point, we are not convinced that is necessary or desirable.

Id.

n63. Id.

n64. Id. at 789.

n65. See supra note 27 and accompanying text.

n66. See Gevurtz, supra note 47, at 434 ("The fact that there have been no reported major trials to apply the Zapata approach raises ques-
tions as to whether courts or litigants ever will be serious about obtaining an independent judicial evaluation of the corporation's interest.").

n67. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986) ("[When] the break-up of the com-
pany [becomes] inevitable ... the directors' role changes from defenders of the corporate bastion to auctioneers charged with getting the best
price for the stockholders at a sale of the company."); Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984) (holding that the test for demand
futility involves "two inquiries, one into the independence and disinterestedness of the directors and the other into the substantive nature of
the challenged transaction and the board's approval thereof"), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del.
2000); Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659-61 (Del. Ch. 1988) (noting that "a decision by the board to act for the primary
purpose of preventing the effectiveness of a shareholder vote" requires that the board "bear[] the heavy burden of demonstrating a compel-
ling justification for such action"); Velasco, supra note 19, at 851-53 (characterizing shifts in the burden of proof on the issue of fairness as
an intermediate standard of review). Cf. Velasco, supra note 19, at 847-49 n.111 (discussing whether Revlon and Blasius should be seen as
separate tests, or as part of Unocal).

n68. See generally Velasco, supra note 19 (proposing an intermediate standard of review for cases involving structural bias that would
balance directorial authority and accountability).

n69. Id. at 876. Under my proposed standard, a reasonable decision would be "one that a prudent and impartial decision maker could realis-
tically - as opposed to merely hypothetically - consider wise." Id. at 877.

n70. Id. at 880.

 Page 41
83 S. Cal. L. Rev. 1231, *

n71. Id. at 826.

n72. Id. at 871.

n73. See id. at 845-53.

n74. I defend this claim infra notes 78-86 and accompanying text.

n75. See, e.g., Bainbridge, Lopez & Oklan, supra note 12, at 563-64 (citing Del. Code Ann. tit. 8, § 145 (2001)); Eisenberg, supra note 12,
at 4.

n76. See, e.g., Del. Code Ann. tit. 8,§§102(b)(7), 141(e), 144, 145(a)-(b) (2010).

n77. Good faith was declared to be part of a triad of fiduciary duties in Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). It
was demoted to a subset of loyalty in Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del. 2006).

n78. See Eisenberg, supra note 12, at 5.

n79. In re The Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006). The other is Stone, 911 A.2d 362.

n80. Disney, 906 A.2d at 67 (quoting In re The Walt Disney Co. Derivative Litig., 907 A.2d 693, 755-56 (Del. Ch. 2005), aff'd, 906 A.2d
27); quoted in Stone, 911 A.2d at 369.

n81. See supra note 78 and accompanying text.

n82. Strine insists that good faith is entirely subjective: it is "the state of mind that must motivate a loyal fiduciary." Strine et al., supra note
12, at 633. Many scholars disagree. See, e.g., Eisenberg, supra note 12, at 23 ("Good faith in law includes objective as well as subjective
elements."); Nowicki, supra note 12, at 469.

n83. See supra note 20 and accompanying text.

n84. See infra Part II.F (discussing statutory exculpation of a director's breach of the fiduciary duty of care).

n85. Black's Law Dictionary 1385 (9th ed. 2009) (defining "reckless").
 Page 42
83 S. Cal. L. Rev. 1231, *

n86. If this is correct, then an intentional breach of the duty of care would not be exculpable because it also would be a breach of the duty
of good faith. See infra notes 322-25 and accompanying text.

n87. See In re The Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006).

n88. See infra notes 326-30 and accompanying text.

n89. Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988). The essential holding of Blasius has been affirmed by the Dela-
ware Supreme Court. See MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1132 (Del. 2003) ("When the primary purpose of a board of
directors' defensive measure is to interfere with or impede the effective exercise of the shareholder franchise in a contested election for direc-
tors, the board must first demonstrate a compelling justification for such action as a condition precedent to any judicial consideration of
reasonableness and proportionately [sic].").

n90. The same point has been made by Andrew Gold. See Andrew S. Gold, The New Concept of Loyalty in Corporate Law, 43 U.C. Davis
L. Rev. 457, 480-83 (2009).

n91. Blasius, 564 A.2d at 654-56.

n92. Id. at 661-62.

n93. Id. at 659-60.

n94. In earlier work, I have argued that the Blasius test should be extended to cover any director action that has "a significant effect of
interference with shareholder democracy." Julian Velasco, Taking Shareholder Rights Seriously, 41 U.C. Davis L. Rev. 605, 658 (2007). I
believe that this is consistent with an intentional misconduct test, provided that the shareholders can establish that the directors intentionally
took action knowing that significant interference with the shareholder franchise would result.

n95. Blasius, 564 A.2d at 658.

n96. Cf. infra notes 336-39 and accompanying text.

n97. See Dennis J. Block, Nancy E. Barton & Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors 84-
90, 93-97 (5th ed. 1998) (discussing abuse of discretion and waste); Brehm v. Eisner, 746 A.2d 244, 262-66 (Del. 2000) (discussing "sub-
stantive due care" and waste).

n98. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996) (Allen, C.).

n99. Id. at 967.

 Page 43
83 S. Cal. L. Rev. 1231, *

n100. See supra notes 19-27 and accompanying text.

n101. See, e.g., Bainbridge, supra note 19, at 90; Andrew S. Gold, A Decision Theory Approach to the Business Judgment Rule: Reflec-
tions on Disney, Good Faith, and Judicial Uncertainty, 66 Md. L. Rev. 398, 401 (2007); Lyman Johnson, The Modest Business Judgment
Rule, 55 Bus. Law. 625, 631-32 (2000); D.A. Jeremy Telman, The Business Judgment Rule, Disclosure, and Executive Compensation, 81
Tul. L. Rev. 829, 830-33 (2007); E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law and Govern-
ance From 1992-2004? A Retrospective on Some Key Developments, 153 U. Pa. L. Rev. 1399, 1421-24 (2005).

n102. See Block, Barton & Radin, supra note 97, at 84-90, 93-97.

n103. Brehm v. Eisner, 746 A.2d 244, 264 (Del. 2000) (footnotes omitted). The court also stated that "to be sure, there are outer limits, but
they are confined to unconscionable cases where directors irrationally squander or give away corporate assets." Id. at 263.

n104. Cf. David Rosenberg, Galactic Stupidity and the Business Judgment Rule, 32 J. Corp. L. 301, 304 (2007) ("Although few courts or
commentators are willing to use the term, substantive due care analysis is in fact alive in Delaware fiduciary law, and has been for at least
two decades.").

n105. Grobow v. Perot, 539 A.2d 180, 189 (Del. 1988) (quoting Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962)), overruled on other
grounds by Brehm, 746 A.2d at 253. See also Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997) ("Roughly, a waste entails an ex-
change of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be
willing to trade."); Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993) ("The legal test [for waste] is severe. Directors are guilty of
corporate waste, only when they authorize an exchange that is so one sided that no business person of ordinary, sound judgment could con-
clude that the corporation has received adequate consideration.").

n106. Zupnick v. Goizueta, 698 A.2d 384, 387 (Del. Ch. 1997) (quoting Steiner v. Meyerson, No. 13139, 1995 Del. Ch. LEXIS 95, at 3
(Del. Ch. July 19, 1995)). According to Chancellor Allen in Gagliardi v. TriFoods Int'l, Inc., 683 A.2d 1049, 1051-52 (Del. Ch. 1996),
"There is a theoretical exception ... that holds that some decisions may be so "egregious' that liability for losses they cause may follow ... .
The exception, however, has resulted in no awards of money judgments against corporate officers or directors in this jurisdiction ... ." But
see Fidanque v. Am. Maracaibo Co., 92 A.2d 311, 321 (Del. Ch. 1952) ("Since the payment ... constitutes an illegal gift of corporate funds
and amounts to waste, ... it is therefore null and void.").

n107. Gagliardi, 683 A.2d at 1051.

n108. See supra note 20 and accompanying text.

n109. See White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001) ("The board's decision was so egregious or irrational that it could not have
been based on a valid assessment of the corporation's best interests."); id. at 553-55; In re The Walt Disney Co. Derivative Litig., 907 A.2d
693, 749 (Del. Ch. 2005) ("The Delaware Supreme Court has implicitly held that committing waste is an act of bad faith."); In re RJR
Nabisco, Inc. S'holders Litig., No. 10389, 1989 Del. Ch. LEXIS 9, at 41 n.13 (Del. Ch. Jan. 31, 1989) ("As I conceptualize the matter, such
limited substantive review as the rule contemplates (i.e., is the judgment under review "egregious' or "irrational' or "so beyond reason,' etc.)
really is a way of inferring bad faith."); Myron T. Steele, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Lim-
ited Liability Companies, 32 Del. J. Corp. L. 1, 29 (2007) (suggesting that earlier cases had treated "bad faith as tantamount to fraud or an
absence of "rationality' or a decision "so far beyond the bounds of reasonable judgment' that it established a "bad faith' act or omission"
(footnotes omitted)).
 Page 44
83 S. Cal. L. Rev. 1231, *

n110. See Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) ("A board of directors enjoys a presumption of sound business judg-
ment, and its decisions will not be disturbed if they can be attributed to any rational business purpose.").

n111. See 1 American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 1.42 (1994) ("A transaction
constitutes a "waste of corporate assets' if it involves an expenditure of corporate funds or a disposition of corporate assets for which no
consideration is received in exchange and for which there is no rational business purpose, or, if consideration is received in exchange, the
consideration the corporation receives is so inadequate in value that no person of ordinary sound business judgment would deem it worth
that which the corporation has paid.").

n112. See infra text accompanying note 170 (quoting Del. Code Ann. tit. 8, § 102(b)(7) (2010)). For a list of similar statutes, see Cindy A.
Schipani, Integrating Corporate Law Principles with CERCLA Liability for Environmental Hazards, 18 Del. J. Corp. L. 1, 34 n.109 (1993).

n113. See, e.g., John L. Reed & Matt Neiderman, "Good Faith" and the Ability of Directors to Assert § 102(b)(7) of the Delaware General
Corporation Law as a Defense to Claims Alleging Abdication, Lack of Oversight, and Similar Breaches of Fiduciary Duty, 29 Del. J. Corp.
L. 111, 113-19 (2004); Strine et al., supra note 12, at 659-63.

n114. Disney, 907 A.2d at 752.

n115. Delaware's exculpation statute is an opt-in provision. In some states, it is an opt-out provision. See, e.g., Ohio Rev. Code Ann. §
1701.59(D) (West 2010). In others, it is a mandatory provision. See, e.g., Ind. Code § 23-1-35-1(e) (2010). In still others, instead of com-
plete exculpation, liability is limited to a specified amount. See, e.g., Va. Code Ann. § 13.1-692.1 (2010).

n116. See, e.g., Teachers' Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 668 (Del. Ch. 2006); Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d
342, 387 (Del. Ch. 2004); Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003); Nagy v. Bistricer, 770 A.2d 43, 49 n.2 (Del. Ch.
2000); In re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 475-76 n.41 (Del. Ch. 2000) (citing Cede & Co. v. Technicolor, Inc.,
634 A.2d 345, 368 n.36 (Del. 1993)); In re ML/EQ Real Estate P'ship Litig., No. 15741, 1999 Del. Ch. LEXIS 238, at 16 n.20 (Del. Ch. Dec.
20, 1999).

n117. See Strine et al., supra note 12. For the sake of convenience, I will refer to the coauthors collectively as "Strine."

n118. See Eisenberg, supra note 12.

n119. Strine et al., supra note 12, at 644-45 (footnotes omitted).

n120. Id. at 646.

n121. Id. at 648.

n122. Eisenberg, supra note 12, at 15.

n123. Id.
 Page 45
83 S. Cal. L. Rev. 1231, *

n124. See id. at 16.

n125. Strine et al., supra note 12, at 646 (footnotes omitted) (quoting Webster's Ninth New Collegiate Dictionary 527 (9th ed. 1988); and
The American Heritage Dictionary of The English Language 757 (4th ed. 2000)).

n126. Id.

n127. Id. at 646 n.47 (alteration omitted) (quoting 5 Oxford English Dictionary 679 (2d ed. 1989) [hereinafter OED]).

n128. 5 OED, supra note 127, at 679.

n129. See infra notes 131-35 and accompanying text.

n130. 2 OED, supra note 127, at 379.

n131. See Webster's Third New International Dictionary of the English Language Unabridged 978 (3d ed. 1993) ("Good faith n : a state of
mind indicating honesty and lawfulness of purpose : belief in one's legal title or right : belief that one's conduct is not unconscionable or that
known circumstances do not require further investigation : absence of fraud, deceit, collusion, or gross negligence - usu. used with in ... .").

n132. See American Heritage Dictionary of the English Language 757 (4th ed. 2000) ("Compliance with standards of decency and hon-
esty.").

n133. See Random House Unabridged Dictionary 822 (2d ed. 1993) ("Good' faith', accordance with standards of honesty, trust, sincerity,
etc. (usually prec. by in) ... .").

n134. See, e.g., Ballentine's Legal Dictionary and Thesaurus 275 (1995) ("Good faith n. Fairness and equity; the absence of improper mo-
tive or of a negligent disregard of the rights of others; the honest and reasonable belief that one's conduct is proper; the opposite of fraud and
deceit."); 1 John Bouvier, Law Dictionary 211 (14th ed. 1880) ("Bona fides. Good faith, honesty, as distinguished from mala fides (bad
faith)."); 1 Alexander M. Burrill, Law Dictionary 213 (2d ed. 1870) ("Bona fides. Lat. In the civil and common law. Good faith; honesty;
sincerity. The opposite of mala fides, (q.v.)."); Merriam-Webster's Dictionary of Law 215 (1996) ("Good faith n [translation of Latin bona
fides] : honesty, fairness, and lawfulness of purpose: absence of any intent to defraud, act maliciously, or take unfair advantage." (second set
of brackets in original)); Law.com Law Dictionary, http://dictionary.law.com/Default.aspx?selected=819 (search "Enter a Legal Term" for
"good faith"; then follow "good faith" hyperlink under "Select a word") ("Good faith n. honest intent to act without taking an unfair ad-
vantage over another person or to fulfill a promise to act, even when some legal technicality is not fulfilled. The term is applied to all kinds
of transactions.").

n135. Black's Law Dictionary 762 (9th ed. 2009).

n136. See Eisenberg, supra note 12, at 16; Strine et al., supra note 12.
 Page 46
83 S. Cal. L. Rev. 1231, *

n137. Id. at 38 (footnote omitted).

n138. Strine et al., supra note 12, at 650-51 (footnotes omitted).

n139. See infra notes 154-56 and accompanying text.

n140. Strine et al., supra note 12, at 634 (emphasis added). See also Lyman Johnson, After Enron: Remembering Loyalty Discourse in
Corporate Law, 28 Del. J. Corp. L. 27, 37-42 (2003).

n141. See supra text accompanying note 30.

n142. In Unocal, the Delaware Supreme Court's interpretation of Guth seems consistent with my own: that the Guth court was speaking
about more than just the duty of loyalty. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985). Immediately after citing
Guth for the "the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation's stockholders,"
the opinion states that "their duty of care extends to protecting the corporation and its owners from perceived harm whether a threat origi-
nates from third parties or other shareholders." Id. (emphasis added) (citation omitted). This suggests that the court understood Guth's affirm-
ative duty to be referring to the duty of care rather than the duty of loyalty.

n143. Admittedly, at the very end, the passage arguably seems to conflate honesty, good faith, and loyalty: "The occasions for the determi-
nation of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is
measured by no fixed scale." Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). Despite the appearance of conflation, however, the passage is
perfectly consistent with the interpretation that I propose: the court is speaking of both fiduciary duties generally and loyalty in particular.
The above-quoted passage could be paraphrased as follows: "The occasions for the determination of breach vel non of fiduciary duty are
many and varied, and no hard and fast rule can be formulated. As a result, the standard of loyalty is measured by no fixed scale."

n144. Strine also relies on Chancellor Allen's opinion in In re RJR Nabisco, Inc. S'holders Litig., No. 10389, 1989 Del. Ch. LEXIS 9 (Del.
Ch. Jan. 31, 1989). Strine quotes the following passage in particular:

Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, or, as is here alleged,
shame or pride. Indeed any human emotion may cause a director to place his own interests, preferences or appetites before the welfare of the
corporation. But if he were to be shown to have done so, how can the protection of the business judgment rule be available to him? In such a
case, is it not apparent that such a director would be required to demonstrate that the corporation had not been injured and to remedy any
injury that appears to have been occasioned by such transaction?

Id. at 46-47. As Strine admits, however, this passage appears in a discussion of good faith, not loyalty. Strine et al., supra note 12, at 676.
Moreover, the preceding sentence makes clear that the passage is not about the duty of loyalty at all, but rather about the business judgment
rule. See Nabisco, 1989 Del. Ch. LEXIS 9, at 46 ("Neither case, however, can be read to hold that the protections of the business judgment
rule would be available to a fiduciary who could be shown to have caused a transaction to be effectuated (even one in which he had no finan-
cial interest) for a reason unrelated to a pursuit of the corporation's best interests."). Although it is true that "Chancellor Allen nowhere artic-
ulates a "third' duty separate from loyalty or care," Strine et al., supra note 12, at 676, his opinion predated the Delaware Supreme Court's
triadic formulation of fiduciary duties and the modern development of the concept of good faith, so that should not be expected. Neverthe-
less, it seems reasonably clear that Chancellor Allen understood that he was doing something different under the guise of good faith than was
typical for the duty of loyalty.

n145. Strine cites Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1345 (Del. 1987) ("[The duty of loyalty] embodies not only
an affirmative duty to protect the interests of the corporation, but also an obligation to refrain from conduct which would injure the corpora-
tion and its stockholders or deprive them of profit or advantage."); and In re The Walt Disney Co. Derivative Litig., No. 15452, 2004 Del.
 Page 47
83 S. Cal. L. Rev. 1231, *

Ch. LEXIS 132, at 24 n.49 (Del. Ch. Sept. 10, 2004) ("As this Court previously stated, the "duty of loyalty ... imposes an affirmative obliga-
tion to protect and advance the interests of the corporation and mandates that [a director] absolutely refrain from any conduct that would
harm the corporation.'" (quoting BelCom, Inc. v. Robb, No. 14663, 1998 Del. Ch. LEXIS 58, at 10 (Del. Ch. Apr. 28, 1998))). Strine et al.,
supra note 12, at 635 n.10. Both cases rely on Guth, however: Ivanhoe does so directly, see Ivanhoe, 535 A.2d at 1345 (citing Guth, 5 A.2d
at 510); and Disney does so indirectly, through BelCom, Inc. v. Robb, 1998 Del. Ch. LEXIS 58, at 10 (citing Guth, 5 A.2d at 510), see Dis-
ney, 2004 Del Ch. LEXIS 132, at 24 n.49.

n146. Strine et al., supra note 12, at 641 n.24.

n147. Strine complains that the court "discovered" the duty of good faith in 1993, see Strine et al., supra note 12, at 639, but his concern is
the categorization of good faith as a free-standing duty. He seems to agree with the substance of the duty, provided it remains a subset of
loyalty. It is ironic that he is not concerned with the discovery of the substance of the duty of good faith as recently as 2005, see In re The
Walt Disney Co. Derivative Litig., 907 A.2d 693, 755-56 (Del. Ch. 2005) (ascribing substantive meaning to duty of good faith), or what
amounts to a substantive discovery of a duty of care in 1985, see Strine et al., supra note 12, at 641 n.24 ("Before [Van Gorkom], the duty of
care had largely an admonitory, rather than enforceable, basis in American corporate law.").

n148. See generally Eisenberg, supra note 20 (discussing how and why standards of review and of standards of conduct diverge in corpo-
rate law).

n149. See infra Part IV.F.

n150. See supra Part II.A.

n151. See supra Parts II.B-II.E.

n152. The alternative is to expand the duty of loyalty to comprise two very divergent standards of review. This is possible but, as I argue in
Part IV, it is simpler to say that they are two different fiduciary duties.

n153. Strine et al., supra note 12, at 634. See also, e.g., id. at 644 ("The only function of a separate duty of good faith would be to fill the
conceptual space created by the shrinking of the traditionally broad duty of loyalty required to accommodate the conversion of the long-
standing definition of a loyal state of mind into a free-standing duty. The free-standing duty of good faith is thus a solution to the problem of
its own invention.").

n154. See, e.g., 1 Block, Barton & Radin, supra note 97, at 261-64; Bainbridge, Lopez & Oklan, supra note 12, at 585 ("The duty of loyalty
traditionally focused on cases in which the defendant fiduciary received an improper financial benefit."); Eisenberg, supra note 12, at 5 ("The
standard of conduct under the duty of loyalty essentially requires a manager to act fairly when he acts in his own pecuniary self-interest or in
the pecuniary interest of an associate or a family member."); Hill & McDonnell, supra note 49, at 835 ("Courts recognize self-dealing in
situations where a director, officer, or controlling shareholder has clearly identifiable, specific monetary interests at stake in a decision that
puts her own self-interest at odds with the interests of the corporation."); Reed & Neiderman, supra note 113, at 121 (noting that "existence,
or lack thereof, of an adverse financial interest" is traditional concept of loyalty).

n155. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 66 (Del. 2006).

n156. Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
 Page 48
83 S. Cal. L. Rev. 1231, *

n157. Cf. United States v. O'Hagan, 521 U.S. 642, 655 (1997) ("Because the deception essential to the misappropriation theory [of insider
trading] involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic
information, there is no "deceptive device' and thus no § 10(b) violation - although the fiduciary-turned-trader may remain liable under state
law for breach of a duty of loyalty.").

n158. See, e.g., Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 662 (Del. Ch. 1988).

n159. See, e.g., Bainbridge, Lopez & Oklan, supra note 12, at 591-94; Eisenberg, supra note 12, at 38.

n160. See Strine et al., supra note 12, at 648-53.

n161. Strine argues that "to somehow contend that it is loyal to engage in consciously unlawful conduct because the directors believed in
good faith that the conduct would be in the best interests of stockholders desiring profits but in bad faith toward society is, well, silly." Id. at
653. With all due respect, this argument is frivolous. No one argues that intentional violations of law should be permitted, or even that they
should not constitute a breach of fiduciary duty. The only question is whether the duty breached is that of loyalty. Strine's argument boils
down to a claim that the duty of loyalty is so expansive that it can easily encompass intentional violations of law. Eisenberg's claim, on the
other hand - or at least mine - is that it is not a natural or obvious fit. Why try to fit the square peg of good faith into the round hole of loy-
alty? And while Strine is confident that even "elementary school students can grasp" his framework, id., it is just as likely that even elemen-
tary school students would not be lost by a move from a framework that had two duties to one that had three, or even five. None of these
frameworks are especially confusing. The question is which one works best.

n162. As Strine points out, the law only permits corporate charters to authorize "lawful acts or activities." See Strine et al., supra note 12, at
650 (quoting Del. Code Ann. tit. 8, § 102(a)(3) (2010)).

n163. I say "undertake" rather than "authorize" because the law need not treat an illegal undertaking as an authorized action.

n164. Even the duty of good faith, which includes the prohibition against intentional violations of law, is not about a duty to the law or
society. It is about honesty and uprightness toward the shareholders. The law merely presumes that shareholders want directors to obey the
law, and that therefore intentional misconduct includes intentional violations of law.

n165. See Bainbridge, Lopez & Oklan, supra note 12, at 592.

n166. Eisenberg, supra note 12, at 6.

n167. Id. at 6-10 (citing Del. Code Ann. tit. 8, §§102(b)(7), 144-145 (2010)).

n168. Strine et al., supra note 12, at 655-59.

n169. Id. at 657.

 Page 49
83 S. Cal. L. Rev. 1231, *

n170. Del. Code Ann. tit. 8, § 102(b)(7).

n171. Strine et al., supra note 12, at 659 ("We do not pretend that section 102(b)(7) does not suggest that there is a category of bad faith
acts that cause corporate injury that is somehow beyond the reach of the duty of loyalty. The separate references to the duty of loyalty and to
acts "not in good faith' can be thought to have exactly that implication.").

n172. Id. at 660.

n173. Id. at 662-63.

n174. Id. at 662.

n175. Id. at 660-62.

n176. I have always believed it was because the drafters had a notion that there might be additional duties or that the courts might shuffle
the content of the various duties. Because the law of fiduciary duties is always developing, this is a reasonable fear. Thus, drafters who tilted
promanagement would not want to limit exculpation to the duty of care; they would want to exculpate everything except a few specified
items. Drafters representing the plaintiffs' bar, on the other hand, would "want[] very broad exceptions." Id. at 662.

n177. Id. at 661.

n178. Id. at 662.

n179. See Eisenberg, supra note 12, at 11 ("In short, the duty of good faith has long been both explicit and implicit in corporation statutes
and implicit in case law. Recently, it has become explicit in case law as well.").

n180. Strine et al., supra note 12, at 660. He goes on to point out that "just as section 102(b)(7) separates the duty of loyalty from "inten-
tional misconduct' and the receipt of "improper personal benefits,' so too does section 102(b)(7) separate its references to "acts not in good
faith' from "knowing violations of law.'" Id.

n181. See Del. Code Ann. tit. 8, § 174 (2010).

n182. Strine et al., supra note 12, at 660. Along the same lines, Strine elsewhere "readily make[s]" "one linguistic concession": that "judges
in particular have referred in the same sentence or paragraph to both the words "loyalty' and "good faith,' leading to the argument that they
must be wholly distinct concepts and that one cannot be subsumed within the other." Id. at 653. He claims, however, that this is mere "redun-
dancy" used "for emphasis and rhetorical flourish." Id. He argues that this cannot be the basis for separating what is essentially the same
concept, or else there might be an infinite number of fiduciary duties. Id. at 653-55. Of course, whether good faith and loyalty are essentially
the same concept is the issue at hand. This argument, however, is best dealt with in a subsequent section. See infra Part IV.B.

n183. The terms "clear" and "clearly" are used throughout Strine's article. See Strine et al., supra note 12.
 Page 50
83 S. Cal. L. Rev. 1231, *

n184. Id. at 633.

n185. For example, Eisenberg argues that good faith has a strong objective component. Eisenberg, supra note 12, at 23. See also 5 OED,
supra note 127, at 679 (stating that "the primary notion [of good faith] seems to have been the objective aspect of confidence well or ill be-
stowed").

n186. See infra text accompanying note 243.

n187. Strine et al., supra note 12, at 666 n.107 (quoting The American and English Encyclopedia of Law 1071 (David S. Garland & Lucius
P. McGehee eds., 2d ed. 1896)).

n188. Id. (quoting Ernest W. Huffcut, The Law of Agency § 90 (2d ed. 1901)).

n189. Id. (quoting Frances B. Tiffany, Handbook on the Law of Principal and Agent § 146 (Richard R.B. Powell ed., 2d ed. 1924)).

n190. Id.

n191. See infra text accompanying note 313.

n192. Strine et al., supra note 12, at 667 (alteration in original) (quoting Wormley v. Wormley, 21 U.S. (8 Wheat.) 421, 438 (1823)).

n193. Id. (quoting 3 Joseph Story, Commentaries on Equity Jurisprudence as Administered in America § 1676 (14th ed. 1918)).

n194. Id. at 667-68 (quoting 4 John Norton Pomeroy, A Treatise on Equity Jurisprudence § 1075 (5th ed. 1941)).

n195. Id. at 668.

n196. Id. at 668 n.125 (alteration in original) (quoting 1 George D. Hornstein, Corporation Law and Practice § 431 (1959) (citation omit-
ted)).

n197. Id. at 668-69 (ellipsis in original) (quoting 1 Victor Morawetz, A Treatise on the Law of Private Corporations § 516 (2d ed. 1886)).

n198. Id. at 669 (second alteration in original) (quoting 2 Seymour D. Thompson, Commentaries on the Law of Private Corporations §
1215, at 164 (2d ed. 1909)).
 Page 51
83 S. Cal. L. Rev. 1231, *

n199. Id. at 669 n.127 (quoting William L. Clark & William L. Marshall, Marshall on Private Corporations 1010 (1902)).

n200. Id. at 672 (alteration omitted) (quoting S. Samuel Arsht, The Business Judgment Rule Revisited, 8 Hofstra L. Rev. 93, 127 (1979)).
That Arsht does not see good faith and loyalty as the same concept is evident from the fact that he deals with them separately, in different
sections. See Arsht, supra, at 115-18, 127-30.

n201. Id. at 668.

n202. I omit Guth because the case has already been discussed. See supra notes 30, 141-44 and accompanying text.

n203. Strine et al., supra note 12, at 669 (alteration in original) (quoting Cahall v. Lofland, 114 A. 224, 228 (Del. Ch. 1921)).

n204. Id. at 667 (alteration in original) (quoting Bodell v. Gen. Gas & Elec. Corp., 132 A. 442, 449 (Del. Ch. 1926)).

n205. Cheff v. Mathes, 199 A.2d 548 (Del. 1964).

n206. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

n207. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

n208. Strine et al., supra note 12, at 670-72.

n209. Strine claims that the following passage from Revlon "explicitly demonstrates the use of good faith to define the core mandate of
loyalty, which is to act solely in the interest of the corporation and its stockholders," id. at 672: "Obtaining the highest price for the benefit of
the stockholders should have been the central theme guiding director action. Thus, the Revlon board could not make the requisite showing of
good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders," Revlon, 506 A.2d at 182. In fact, this passage is
perfectly consistent with the notion that good faith is superior to loyalty. It says that directors could not show good faith because they ig-
nored loyalty; it does not say they could not show loyalty because they were not acting in good faith.

n210. Lyman Johnson shows that care is closely related as well. See infra notes 231-39 and accompanying text.

n211. As will be discussed more fully in the next part, good faith, loyalty, and care (as well as objectivity and rationality) are all aspects of
one core fiduciary duty: to pursue the interests of the corporation and its shareholders.

n212. Hill & McDonnell, supra note 13, at 1788-91.

n213. Id. at 1788-89 (footnotes omitted).

 Page 52
83 S. Cal. L. Rev. 1231, *

n214. See id. at 1789.

n215. See id. at 1791.

n216. See id. at 1788.

n217. See Hill & McDonnell, supra note 49.

n218. See Velasco, supra note 19.

n219. See Hill & McDonnell, supra note 13, at 1789 (describing good faith as "a more nebulous category").

n220. See supra notes 78-86 and accompanying text.

n221. See Velasco, supra note 19, at 853-65.

n222. See supra notes 45-47 and accompanying text.

n223. See Velasco, supra note 19, at 874.

n224. See supra Part II.C.

n225. See supra Part II.D.

n226. In re The Walt Disney Co. Derivative Litig., 906 A.2d 27, 65 (Del. 2006) ("Grossly negligent conduct, without more, does not and
cannot constitute a breach of the fiduciary duty to act in good faith.").

n227. Hill & McDonnell, supra note 13, at 1788.

n228. See Strine et al., supra note 12, at 635 ("It is possible to conceive of there being only one core duty ... .").

n229. See id. at 635 ("We are willing to go further and to say that it is possible to conceive of there being only one core duty, that of loy-
alty, and that the duty of care is itself simply a component of what is expected of a faithful - that is, loyal - fiduciary."); Hill & McDonnell,
supra note 13, at 1779 (citing Hill & McDonnell, supra note 49, at 855) ("We think the duty of care was always fundamentally a duty of
loyalty.").
 Page 53
83 S. Cal. L. Rev. 1231, *

n230. See Del. Code Ann. tit. 8, § 102(b)(7) (2010); supra text accompanying note 170 (quoting Del. Code Ann. tit. 8, § 102(b)(7)).

n231. See Lyman Johnson, Rethinking Judicial Review of Director Care, 24 Del. J. Corp. L. 787, 808-09 (1999). Johnson does not himself
argue that care is the one core duty. His argument, however, provides support for such a claim.

n232. Id. at 808.

n233. Id.

n234. Id.

n235. Id.

n236. Id. at 808-09.

n237. Aronson v. Lewis, 473 A.2d 805 (Del. 1984).

n238. See Johnson, supra note 231, at 806.

n239. See Aronson, 473 A.2d at 812 ("Directors have a duty to inform themselves, prior to making a business decision, of all material in-
formation reasonably available to them. Having become so informed, they must then act with the requisite care in the discharge of their du-
ties."), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).

n240. The central importance of good faith can be highlighted by the following anecdote:

In the 1960s, when Delaware was revising its corporation law, Samuel Arsht, a leading figure of the Delaware corporate bar, is said to have
proposed that the law be simplified to the following principle: Directors of Delaware corporations can do anything they want, as long as it is
not illegal, and as long as they act in good faith.

Edward B. Rock, Saints and Sinners: How Does Delaware Corporate Law Work?, 44 UCLA L. Rev. 1009, 1015 (1997).

n241. See supra notes 75-77, 185-209 and accompanying text.

n242. See supra notes 166-67 and accompanying text.

n243. Cf. supra text accompanying note 186.

 Page 54
83 S. Cal. L. Rev. 1231, *

n244. Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003). "A director cannot act loyally towards the corporation unless she acts in
the good faith belief that her actions are in the corporation's best interest." Id.; Stone ex rel. AmSouth Bankcorporation v. Ritter, 911 A.2d
362, 370 (Del. 2006) (quoting Guttman, 823 A.2d at 506 n.34).

n245. Cf. Johnson, supra note 231, at 808-09.

n246. Cf. infra text accompanying note 319.

n247. Cf. In re The Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005) ("Fundamentally, the duties traditionally ana-
lyzed as belonging to corporate fiduciaries, loyalty and care, are but constituent elements of the overarching concepts of allegiance, devotion
and faithfulness that must guide the conduct of every fiduciary.").

n248. See infra text accompanying note 313.

n249. It is worth noting that moving along the spectrum of abstraction/specificity is not discrete, but continuous. Thus, it is inappropriate to
number the levels of abstraction or to refer to them as the "next" or "previous" level. They should be referred to as "different" levels of ab-
straction in order to acknowledge that there may be other possibilities along the way. Nevertheless, for the sake of convenience, I will refer
to the first three levels of abstraction that I discuss as the first, second, and third level, respectively. I do not mean to suggest that they are
objectively the first, second, and third levels of abstraction.

n250. See Hill & McDonnell, supra note 13, at 1788-89; Strine et al., supra note 12, at 634.

n251. Hill & McDonnell, supra note 13, at 1789.

n252. This is true as an initial matter. If the shareholders manage to rebut the presumption of the business judgment rule, however, then the
burden that shifts to the directors is quite demanding. See supra notes 88-96 and accompanying text.

n253. See Del. Code Ann. tit. 8, § 102(b)(7) (2010).

n254. Strine et al., supra note 12, at 634.

n255. See infra text accompanying note 276.

n256. Hill & McDonnell, supra note 13, at 1789.

n257. The parties disagree on the exact content of good faith. Where Strine would make it entirely subjective, see Strine et al., supra note
12, at 644, 695-96, Eisenberg would include a significant objective component, see Eisenberg, supra note 12, at 23, 72. In an even more
significant departure, Hill and McDonnell would make it "the vast middle ground" which would cover structural bias. See Hill & McDon-
nell, supra note 13, at 1770.
 Page 55
83 S. Cal. L. Rev. 1231, *

n258. According to the Stone court, "good faith may be described colloquially as part of a "triad' of fiduciary duties that includes the duties
of care and loyalty." Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del 2006).

n259. According to Hill and McDonnell, "If we then descend one more level of abstraction, we find that the good faith region in turn subdi-
vides at present into a variety of different factual circumstances and related standards of review." Hill & McDonnell, supra note 13, at 1789.
As I argued earlier, see supra notes 220-26 and accompanying text, Hill and McDonnell misunderstand the concept of good faith and con-
flate it with bias. As I will show in the next section, bias is an independent category that deserves equal footing on the third level of abstrac-
tion. Thus, much of the work that Hill and McDonnell ascribe to the fourth level of abstraction is actually accomplished in my (modified)
third level.

n260. See In re The Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006); supra text accompanying note 80 (quoting Disney,
906 A.2d at 67).

n261. Strine et al., supra note 12, at 654-55 (footnotes omitted).

n262. See, e.g., Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002); Solomon v. Armstrong, 747 A.2d 1098, 1112-13 (Del. Ch. 1999).

n263. See Smith v. Van Gorkom, 488 A.2d 858, 874 (Del. 1985), overruled on other grounds by Gantler v. Stephens, 965 A.2d 695, 713
n.54 (Del. 2009).

n264. See, e.g., Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998) ("The duty of directors to observe proper disclosure requirements derives
from the combination of the fiduciary duties of care, loyalty, and good faith."); Zirn v. VLI Corp., 621 A.2d 773, 778 (Del. 1993) ("The
requirement that a director disclose to shareholders all material facts bearing upon a merger vote arises under the duties of care and loyalty."
(citing Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983))); O'Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 914-15 (Del. Ch. 1999)
("A claim for breach of the fiduciary duty of disclosure implicates only the duty of care when the factual basis for the alleged violation sug-
gests that the violation was made as a result of a good faith, but nevertheless, erroneous judgment about the proper scope or content of the
required disclosure.").

n265. It would be better if the distinction were about the amount of scrutiny and the possibility of liability rather than merely about excul-
pability and indemnifiability, see supra notes 251-56 and accompanying text, but it is nevertheless an important distinction. Moreover, as I
have suggested, the real distinction focuses not on liability, but on other factors that have ramifications for liability. See supra Part IV.C.

n266. My characterization of the second level of abstraction is somewhat more descriptive than exculpability, but only about as much as
the labels "care" and "loyalty."

n267. See supra notes 217-25 and accompanying text.

n268. By the term objectivity, I mean nothing more than not influenced by (structural) bias.

n269. See supra tbl.

 Page 56
83 S. Cal. L. Rev. 1231, *

n270. See Velasco, supra note 19, at 860-65.

n271. See supra tbl.

n272. See Velasco, supra note 19, at 825.

n273. See id. at 824-25.

n274. See id. at 914-16. The Delaware Supreme Court decision in Lyondell Chemical Co. v. Ryan, 970 A.2d 235, 243-44 (Del. 2009),
arguably provides support for this position. In that case, which involved Revlon duties, the directors were held to have not breached the duty
of loyalty because they had not "knowingly and completely failed to undertake their responsibilities." At most, they had breached only the
duty of care, and thus were protected by the exculpation provision in the corporate charter. Id. at 239-40. In other words, the reasonableness
of their actions was protected by exculpation, while any intentional misconduct was not.

n275. Injunctive relief can be especially helpful under the Revlon model of enforcement, which allows courts to undo contractual terms
under appropriate circumstances. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 185 (Del. 1986); Paramount
Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 50-51 (Del. 1994).

n276. See supra note 255 and accompanying text. Although misconduct may be more likely because of bias, that is unavoidable and not the
result of director action.

n277. I suspect that most people would assume that objectivity, which is similar to loyalty, should not be exculpable, and that rationality,
which is similar to care, should be exculpable. Thus, my conclusions may appear counterintuitive.

n278. See supra note 97 and accompanying text.

n279. See supra notes 107-09 and accompanying text.

n280. Another way of saying this is that, for purposes of section 144, the duty of rationality is a subset of the duty of good faith; or, more
precisely, wasteful action is not action taken in good faith.

n281. See supra Part IV.D.

n282. This would be difficult to do. See infra notes 333-42 and accompanying text.

n283. See supra notes 97, 103 and accompanying text.

n284. A fourth possibility would be to abandon review of substance altogether, but this is something that the courts seem to be unable to
do. See supra notes 102-03 and accompanying text.
 Page 57
83 S. Cal. L. Rev. 1231, *

n285. See, e.g., William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function over Form: A Reassessment of Standards of Review in
Delaware Corporation Law, 56 Bus. Law. 1287, 1291-95 (2001).

n286. See Velasco, supra note 19, at 845, 870-83.

n287. See Allen, Jacobs & Strine, supra note 285. For the sake of convenience, I will refer to the coauthors collectively as "Allen."

n288. See id. at 1292.

n289. See id. at 1293.

n290. See id. at 1317-18; William T. Allen, Jack B. Jacobs & Leo E. Strine Jr., Realigning the Standard of Review of Director Due Care
with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 Nw. U. L. Rev. 449, 457
(2002). It is worth noting that, despite occasional rhetoric to the contrary, Allen does not deny that there is a fifth paradigm. See Allen, Ja-
cobs & Strine, supra note 285, at 1296 ("Where the business judgment standard applies, a director will not be held liable for a decision -
even one that is unreasonable - that results in a loss to the corporation, so long as the decision is rational." (emphasis added)).

n291. Allen, Jacobs & Strine, supra note 285, at 1311.

n292. Id. at 1315.

n293. Id. at 1320 (emphasis omitted).

n294. Id. at 1316.

n295. See Velasco, supra note 9, at 416-20.

n296. See Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996) ("Blasius' burden of demonstrating a "compelling justification' is quite oner-
ous, and ... therefore [should be] applied rarely."); Allen, Jacobs & Strine, supra note 285, at 1311-16.

n297. See, e.g., MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003). In that case, the Chancery Court had rejected the plaintiff's
Blasius claim and upheld the defendants' actions under Unocal. Id. at 1121. The Delaware Supreme Court reversed, holding for the plaintiffs
under Blasius. Id. at 1332-33. In this case, at least, the difference between the Unocal and Blasius standards was significant.

n298. See Allen, Jacobs & Strine, supra note 285, at 1320-21.
 Page 58
83 S. Cal. L. Rev. 1231, *

n299. Id. at 1321.

n300. Cf. Velasco, supra note 19, at 847-48 n.111 ("The Revlon decision can be seen either as an entirely new test or merely as a specific
application of Unocal.").

n301. See Hill & McDonnell, supra note 13, at 1770.

n302. See supra note 215 and accompanying text.

n303. If I am wrong on either point, the sequence may vary. Other possibilities include:

Loyalty--Good Faith--Objectivity--Care--Rationality
Loyalty--Objectivity--Good Faith--Care--Rationality
Loyalty--Good Faith--Rationality--Objectivity--Care
Loyalty--Objectivity--Good Faith--Rationality--Care

n304. On the other hand, if the duty of rationality is considered a proxy for the duty of good faith, see supra note 109 and accompanying
text, it becomes difficult to locate on the spectrum.

n305. See, e.g., Allen, Jacobs & Strine, supra note 285, at 1301-02; Michael P. Dooley, Two Models of Corporate Governance, 47 Bus.
Law. 461, 486 (1992) ("The law has always dealt more strictly with the unfaithful servant than with the careless one."); Strine et al., supra
note 12, at 634.

n306. On its face, intentional misconduct might seem to be as difficult to prove as irrationality, and arguably more difficult. The duty of
good faith, however, covers more than just malicious behavior. It also covers other intentional conduct that the law deems misconduct, such
as intentional violations of law. As a result, the burden on the shareholders with respect to the duty of good faith is not nearly as great as the
burden with respect to the duty of rationality.

n307. This spectrum is more tentative for two reasons. First, as to some duties, the business judgment rule is rarely, if ever, rebutted, so the
courts have not had very many opportunities to flesh out the issue. See supra note 106, infra note 330 and accompanying text. Second, the
law seems to be in doubt, as will be discussed in the next part of this Article. See infra notes 327-28 and accompanying text.

n308. Under current Delaware law, if the shareholder can rebut the presumption of the business judgment rule, the directors must prove
entire fairness. See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 371 (Del. 1993). Nevertheless, the inquiry may turn on the question of
damages. See, e.g., Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1176-78 (Del. 1995).

n309. See Chesapeake Corp. v. Shore, 771 A.2d 293, 330 (Del. Ch. 2000); infra notes 336-39 and accompanying text.

n310. At least this is true under my proposed test for the third paradigm. See supra notes 67-73 and accompanying text.
 Page 59
83 S. Cal. L. Rev. 1231, *

n311. Venn diagrams are usually pictured as three overlapping circles. This image is sufficient to convey the general sense. It is possible to
create Venn diagrams for more than three sets. See generally Wikipedia, the free encyclopedia: Venn diagram, http://en.wikipe-
dia.org/wiki/Venn_diagram (last visited Aug. 4, 2010) (illustrating extensions to higher numbers of sets).

n312. Of course, because of a lack of judicial competence to review business decisions, this aspect is deemphasized.

n313. See supra text accompanying note 248.

n314. Strine et al., supra note 12, at 639. Strine downplays the breadth of the principle, however, by emphasizing the duty of loyalty, see id.
at 634, 636, 639, and deemphasizing the duty of care, id. at 639 ("Because a loyal director must try to perform her acts with care ... .").

n315. It would not be true at lower levels of abstraction, where specific conduct can be considered a fiduciary duty.

n316. For a description of the poison pill, see Julian Velasco, Just Do It: An Antidote to the Poison Pill, 52 Emory L.J. 849, 856-68 (2003).

n317. Of course, shareholders will not recover damages if the duty is exculpable.

n318. See supra note 264 and accompanying text.

n319. Cf. supra text accompanying note 246.

n320. For example, self-dealing fits well with loyalty, takeovers fit well with structural bias, and sloppiness fits well with care.

n321. See, e.g., John C. Coffee, Jr., The Mandatory/Enabling Balance in Corporate Law: An Essay on the Judicial Role, 89 Colum. L. Rev.
1618, 1650 (1989) ("While the duty of loyalty is at the core of fiduciary duties, the duty of care seems more marginal."); Johnson, supra note
140, at 28.

n322. In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

n323. That is how the author of the opinion, Chancellor Allen, characterized it. See id. at 971; William T. Allen & Reinier Kraakman,
Commentaries and Cases on the Law of Business Organization 279 (2003); Hill & McDonnell, supra note 13, at 1777-78; Johnson, supra
note 231, at 831. Even Stone acknowledges that Caremark did not explicitly characterize itself otherwise. See Stone ex rel. AmSouth Ban-
corporation v. Ritter, 911 A.2d 362, 369-70 (2006).

n324. Strine insists that this is not what happens under Stone. See Strine et al., supra note 12, at 686-88.

n325. See Del. Code Ann. tit. 8, § 102(b)(7) (2010).

 Page 60
83 S. Cal. L. Rev. 1231, *

n326. Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993).

n327. See, e.g., Bishop, supra note 12, at 918-19; Johnson, supra note 101, at 630-37.

n328. See, e.g., Allen, Jacobs & Strine, supra note 285, at 1301-05; Symposium, Judicial Standards of Review of Corporate Fiduciary Ac-
tion, 26 Del. J. Corp. L. 995, 1002-04 (2001) (remarks of Vice Chancellor, now Justice Jacobs).

n329. See Velasco, supra note 19, at 835. At one point, the court in Cede & Co. seems to disagree: "Provided that the terms of 8 Del. C. §
144 are met, self-interest, alone, is not a disqualifying factor even for a director. To disqualify a director, for rule rebuttal purposes, there
must be evidence of disloyalty." Cede & Co., 634 A.2d at 363. The court's comment refers not to the entire fairness test itself, however, but
rather to the effect of one director's conflict to a cleansing vote under section 144. Id.

n330. Before Van Gorkom, there were few instances, if any, of liability under the duty of care. See Strine et al., supra note 12, at 641 n.24
("Before [Van Gorkom], the duty of care had largely an admonitory, rather than enforceable, basis in American corporate law.").

n331. See Cede & Co., 634 A.2d at 361 ("To rebut the [business judgment] rule, a shareholder plaintiff assumes the burden of providing
evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty - good faith, loyalty, or
due care."). But see id. at 371 ("A breach of either the duty of loyalty or the duty of care rebuts the presumption that the directors have acted
in the best interests of the shareholders, and requires the directors to prove that the transaction was entirely fair.").

n332. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985).

n333. See Allen, Jacobs & Strine, supra note 285, at 1302-03; Bainbridge, Lopez & Oklan, supra note 12, at 585.

n334. Cf. Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1140 (Del. Ch. 1995) ("I recognize the force of the claim that a process that
is uninformed can never be fair to shareholders.").

n335. This was the determination in Cede & Co. See Cinerama, 663 A.2d at 1178-80.

n336. See supra note 96 and accompanying text.

n337. See supra notes 81-82 and accompanying text.

n338. Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660-61 (Del. Ch. 1988).

n339. See, e.g., Chesapeake Corp. v. Shore, 771 A.2d 293, 320 (Del. Ch. 2000) (describing delay "to provide more time for deliberations"
as a "board action[] that influences the electoral process in [a] legitimate way[]").

n340. See supra notes 105-07 and accompanying text.

 Page 61
83 S. Cal. L. Rev. 1231, *

n341. Alternatively, the courts could simply acknowledge that the burden is impossible to meet once waste has been established and find
the directors liable.

n342. Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 369 (Del. 1993).

n343. See, e.g., Bainbridge, Lopez & Oklan, supra note 12, at 587-88.

n344. Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983) ("Fashion any form of equitable and monetary relief as may be appropriate
... ."); quoted in Cede & Co., 634 A.2d at 371.

n345. Some commentators seem to believe that Cede & Co. relieved the shareholders of any burden to prove damages under the Delaware
Model. See, e.g., Allen & Kraakman, supra note 323, at 261. I am not so sure. Cede & Co. merely stated that proof of damages was not nec-
essary for rule rebuttal purposes. See Cede & Co., 634 A.2d at 371 ("To require proof of injury as a component of the proof necessary to
rebut the business judgment presumption would be to convert the burden shifting process from a threshold determination of the appropriate
standard of review to a dispositive adjudication on the merits."). The court never stated what would have to be proved if the shareholders
were to rebut the presumption of the business judgment rule and the directors were to fail to establish fairness. Some have assumed that
damages would follow automatically. I do not believe that is a fair reading of the opinion. To the contrary, the court indicated that any dam-
ages should be "susceptible to proof" and "appropriate under the circumstances." Id. It is hard to see how damages could be appropriate if no
injury can be proven.

n346. It would be possible to preserve a presumption aspect of the business judgment rule: this would be the requirement that, in order to
survive a motion to dismiss, the shareholders must not merely allege negligence, but make a satisfactory showing of gross negligence. Even
so, it is better classified as a pleading requirement than as a presumption.

n347. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 254 (Del.
2000).

n348. See supra notes 45-46 and accompanying text.

n349. See supra note 344 and accompanying text.

n350. See supra note 73 and accompanying text.

n351. See Velasco, supra note 19, at 876-79.

n352. Unless, of course, directors are exculpated. See supra notes 272-76 and accompanying text.

n353. See supra notes 80-81 and accompanying text.

 Page 62
83 S. Cal. L. Rev. 1231, *

n354. See supra notes 89-96 and accompanying text.

n355. See supra notes 105-06 and accompanying text.

n356. See Black's Law Dictionary 1301 (9th ed. 2009) (defining "preponderance of the evidence").