Lack of good faith is now clearly a duty of loyalty violation as shown by the Delaware Supreme Court cases discussed below (the Disney and Stone case). Thus, the two are used interchangeably in statutes and in court opinions dealing with the obligations of directors and officers.
A more subtle distinction could be that a lack of good faith can involve actual intent to harm the corporation or an intentional dereliction of duty and a conscious disregard for one's responsibilities. This, the implicates a duty of loyalty.
TheStone indicated that the failure to act in good faith does not itself impose liability but does so because good faith is "a subsidiary element, i.e., a condition of the fundamental duty of loyalty." Thus, good faith is not an independent fiduciary duty, but the lack of good faith means that the directors are not acting in the best interest of the company and they are breaching their duty of loyalty.
Plaintiffs have tried to avoid the limitation on damages in a duty of care case as a result of exculpatory provisions from statutes like Delaware's Section 102(b)(7) by arguing that the defendants did not in fact act in good faith. The Delaware courts have indicated that in order to rebut the business judgment rule, plaintiff must provide evidence that the decision breached one of the "triad of fiduciary duties, loyalty, good faith or due care (cede & Co v. technicolor inc). What remained unclear was how good faith differed from the duty of care or loyalty and whether good faith was itself an independent fiducairy duty.
Disney litigation and good faith
The Disney litigation involved Walt Disney ("Disney") and the lucrative employment contract and severance for Michael Ovitz. The case dealt with the issues of good faith and the business judgment rule. Ovitz received approximately $130 million in compensation and severance after serving only fourteen months as president. The deal was orchestrated by his friend, Disney's Chief Executive Officer, Michael Eisner. The first complaint filed had been dismissed earlier for failure to sufficiently allege particularized facts support the case of action and was affirmed by the Delaware Supreme Court. The plaintiffs then used their right to inspect the books and records of Disney to gather more information for litigation and to have more particularized facts for a complaint and a new complaint was filed and was not dismissed.
In the subsequent trial it turned out that Ovitz and Eisner were unable to manage Disney together and the hiring was problematic from the start. Plaintiffs attacked the large amount of compensation for such as short tenure claiming a breach of fiduciary duty of care, good faith, and waste. Approximately $92 million of the $130 million was the result of stock options Ovitz was able to keep so long as his termination was not for cause. This was a case of malfeasance. The court found that the process failed to meet the best practice standards, where the documentation should have indicated that the compensation committee of the board understood the potential compensation under different scenarios including the magnitude of the severance package for termination without cause. But the court found that there was sufficient evidence to find that they acted in an informed manner and thus no violation of the duty of care.
Plaintiffs also argued that the directors had acted in bad faith. The Delaware Supreme Court affirmed the lower court decision and the view that bad faith needed to be more than acting without information and inadequate deliberation which was essentially a due care analysis. The court held that good faith was distinguishable from a duty of care and would require more proof than a duty of care violation. The court found support for that idea from the fact that the legislature in Sectino 102(b)(7) allowed for exculpation for duty of care damages, but made an exception for actions not in good faith. Thus, to get damages for a lack of good faith, would require more than a duty of care violation. Since there was no lack of duty of care in Disney there could not be a lack of good faith.
Notwithstanding the lack of good faith in Disney, the Delaware Supreme Court decided to discuss good faith in order to clarify its parameters and to show how it differed from the duty of care and gross negligence. According to the court a lack of good faith would include conduct motivated by subjective bad intent and by an actual intent to harm the corporation. In addition, an intentional dereliction of duty and a conscious disregard for one's responsibilities woudl also constitute a lack of good faith because it shows more culpability (a malevolent intent) than the gross negligence of duty of care. The Delaware Supreme Court cited with approval the trial court's examples of lack of good faith. They were: 1) an intentional act in not advancing the corporation's best interest; 2), an intent to violate positive law; 3) intentionally failing to act in face of a duty to act i.e., a conscious disregard of duty. What the Delaware Supreme Corut did not clarify was whether good faith was an independent theory of fiduciary duty liability.