Corporate boards’ loss of faith in Delaware’s elusive new ‘good faith’ contrivance

Delaware has long been a popular choice for corporate headquarters, with over two-thirds of Fortune 500 firms and 70% of U.S. initial public offerings incorporated there. The state's specialized court system and predictable rulings have contributed to its appeal. However, a recent court decision in a high-profile case involving Cloudflare has reignited concerns that the corporate exodus from Delaware may only accelerate in the future.

Cloudflare's special committee brought in a renowned governance expert to discuss the potential advantages and drawbacks of dual-class share structures. While the panel found that well-governed, founder-led companies with dual-class shares tend to outperform others, they also noted that such structures should be reconsidered when they become obsolete or abused.

The decision to apply Delaware's "good faith" standard in this case has sparked debate. The term "good faith" was not explicitly defined in the recent Delaware corporate code rewrite, SB 21, which aimed to curb corporate departures from the state. Instead, the court took a novel approach by assuming good faith in the board's actions without requiring concrete evidence of wrongdoing.

This interpretation of "good faith" is at odds with the traditional understanding of the term, which typically implies a duty to act with honest intentions.