Wednesday, May 03, 2006

Business Judgment Rule

Typically a corporation's directors can avoid liability for making bad decisions because we presume that they have acted out of the intent to enhance shareholder value. When using the defense of the business judgment rule, three elements are involved. First, you must show that the director acted in good faith. Second, you have to show that he or she performed adequate investigation and third, used that information when deciding how to act.

When there is a situation where there is unsettled law on a matter, and reasonable people can differ as to the proper course of action, then there is no standing for suit when a director elects one course of action over the other. Basically, to violate the business judgment rule, you have to have a showing that the director acted in a way that even a brain-dead monkey with postnasal drip would know to be bad for the company.

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