Shield of Immunity for Corporation Board of Director Governance– The Business Judgment Rule: A Rule That Isn’t a Rule…

The ‘business judgment rule’ is one of the fundamental concepts in corporate governance… It’s a legal principle which grants directors, officers, and agents of a company immunity from lawsuits relating to corporate transactions, if it’s found that they have acted in good faith and in the best interest of the company when making decisions– It’s a safe harbor for the directors of a corporation and their decisions…

The business judgment rule is rooted in a 100-year history in which courts generally avoid substituting the judgment of a judge for that of the board. It’s the essence of the business judgment rule that a court will not apply 20/20 hindsight to second-guess a board’s decision, except in rare cases where a trans­action may be so egregious on its face that board approval cannot meet the test of business judgment…

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According to sekicho; the business judgment rule only provides that the directors won’t be held personally liable for a breach of their fiduciary duty so long as their decisions meet certain criteria. If all of the criteria are not met, the safe harbor disappears, but the breach of the directors’ duty still has to be proven separately…

Irrationality is the outer limit of the business judgment rule. A court will not substitute its own notion of what is, or is not a sound business judgment on the approval of a transaction by a majority of indepen­dent and disinterested directors… this almost always bolsters the presumption that the ‘business judgment rule’ is attached to transactions approved by a board of directors that might later be attacked on grounds for the lack of ‘due-care’…

In the article What is the Business Judgment Rule? by Fred Abramson writes: There is no shortage of  examples of corporate wrongdoing; officers and directors have been using the business judgment rule as an excuse for corporate malfeasance since the stone age… This defense is used in a range of complex legal cases, for example; from the mortgage-backed securities indiscretions, to the relatively mundane cases where officers are accused of purchasing sports tickets out of the corporate till for personal use…

The business judgment rule, which began as a minor exception, is now so strong a winning argument that the only fun left is trying to prove that it  does not cover absolutely all forms of corporate stealing… If you are an officer or director of a corporation then you are responsible for managing and directing the business and affairs of the corporation, and the larger the business, the more challenging the issues the officers face…

The courts have given great leeway to decisions that directors and officers must make, and under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence…

In the article Rule That Isn’t A Rule– Business Judgment Rule by Douglas M. Branson writes: The much misunderstood business judgment rule is not a ‘rule’ at all: It has no mandatory content: It involves no substantive ‘do’s or ‘don’ts… Instead, it’s a standard of judicial review, entailing only slight review of business decisions… Alternatively, it could be called a standard of non-review, entailing no review of the merits of a business decision corporate officials have made… The business judgment rule is multi-faceted: Most generally, it acts as a presumption in favor of corporate managers’ actions.

Stronger still, the rule provides safe harbor that makes both directors and their actions unassailable if certain prerequisites have been met. In litigation, the rule is a means for conserving judicial resources, thereby permitting courts to avoid being mired down in rehashing decisions that are inherently subjective and ill-suited for judges, as opposed to business men and women. Last of all, the ‘rule’ is the law’s implementation of broad economic policy, built upon economic freedom and the encouragement of informed risk-taking…

Other uses to which it may be put include; the means by which boards of directors adopt corporate takeover defenses and by which, after the fact, courts review the adoption of those defenses when disgruntled shareholders pursue litigation. Another use is as a means by which corporations and their attorneys evaluate and, based upon that evaluation, recommend that courts dismiss derivative litigation…

Hence, when properly applied, the rule permits courts to accord to boards of directors the proper amount of deference to board decisions. Last of all, the rule provides a schematic for any advisor counseling any collegial group, and not just a board of directors, to reach a judgment or decision that in all likelihood will be a sound one…

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In the article Business Judgment Rule by Michael L. Rich writes: The business judgment rule can afford significant protective armor to directors and officers. It does not, however, shield directors or officers from instances of fraud, self-dealing, or other unconscionable conduct.

When director and officer liability claims arise, it’s important to understand which party will bear the burden of proof and how expansive the defense is under the applicable law. If the derivative suit involves the board’s decision to reject a shareholder’s demand for litigation or pre-suit demand is excused, the directors will bear the burden of proving they were disinterested and independent.

If the shareholder has not made a demand to the board, the shareholder has the burden to disprove the applicability of the business judgment rule. If a minority shareholder claiming oppression shows self-dealing or other disabling factors, or if there is a conflict of interest, the burden shifts to the board of directors. However, the business judgment rule’s application and operation often depend on which state law applies and the circumstances presented, for example; New York’s business judgment rule is more deferential to the board of directors. A Delaware court, on the other hand, may apply its own independent business judgment in certain instances…

In the article Business Judgment Rule by Kyle Hulten writes: Corporation’s board of directors has a fiduciary duty to protect the interests of the corporation, and to act in the best interests of its shareholders. If directors take actions that are not in the best interest of the corporation, shareholders may bring a lawsuit against them. In order for a shareholder to succeed in a case against a director, the shareholder must overcome the ‘business judgment rule’ which creates a presumption that in making a business decision the directors of a corporation acted on; informed-basis, good-faith, honest-belief… that the action taken was in the best-interest of the company…

To rebut the business judgment rule a shareholder plaintiff has the burden of demonstrating that a director breached; duty of good-faith, duty of loyalty, duty of care… According to the Delaware Supreme Court; directors’ decisions will be respected by courts unless the directors lack independence relative to the decision, do not act in good-faith, act in a manner that cannot be attributed to a rational business purpose or reach a decision by a grossly negligent process that includes the failure to consider all material facts reasonably available…

In the article Galactic Stupidity and the Business Judgment Rule by David Rosenberg writes: The only real difference in various formulations of the business judgment rule involves the question whether if, good-faith and due-care are established, there nevertheless remains room for a judicial judgment concerning the wisdom of the decision…

It’s a truth almost universally acknowledged that most courts will not review the substance of the business decisions of corporate directors except under extraordinary circumstances. Embodied in the much-debated business judgment rule is the deference displayed towards the decisions of corporate directors arises not from a belief that directors are always right, or even always honorable, but from a belief that ‘investors’ wealth would be lower if managers’ decisions were routinely subjected to strict judicial review…

Corporate directors take the kind of risks that investors want them to take because the directors know that, whatever the outcome, stockholders will not have any legal recourse for losses arising from those actions unless the decision makers violated a duty, such as; loyalty, good faith… The belief in this general principle of the business judgment rule is so widespread that, despite scandals and negative publicity surrounding the conduct of corporate directors, few participants in the debate are calling for significant changes to the rule’s deference to actions taken by corporate decision-makers…

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Practically speaking, the business judgment rule is simply a policy of judicial non-review, however, the problem is– to identify the circumstances in which review is necessary… While many academics and judges repeatedly assert that the business judgment rule does not allow for review of the substance of director decision-making… There are three primary justifications for the business judgment rule.

First, courts are hesitant to presume to know more about business than corporate directors. Judges are experts in law, not business, and are ill-equipped to retrospectively determine the relative merits of a business decision… Second, without a rule like the business judgment rule, it would be difficult for corporations to recruit qualified directors that would be willing to occupy a seat on the board when they would be subject to immense personal liability… Third, the business judgment rule enables corporate directors to be less risk-averse…

According to Jennifer Lynn Peters; courts acknowledge that, while shareholders might disagree with a management decision, and while it may be apparent in hindsight that the decision was wrong, the decision can withstand an attack because it was made in good-faith by disinterested persons. In the absence of fraud or bad-faith, the business judgment rule thus often provides a complete defense to rising claims of breach of fiduciary or other obligations being levied against directors, officers, and managers

At the core of the business judgment rule is whether courts should judge the reasonableness of directors’ decisions. Judicial respect of directorial discretion and decisions is not the same as simply the abandonment of the judicial post.

The judiciary retains the possibility of intervention in appropriate cases, such as when there is fraud or self-interestedness which imbues a decision. But in what instances should directorial accountability trump directorial authority? What is the appropriate level of judicial respect to directors’ decisions that should be adopted? And, therein lies the crux of the dilemma…