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.

1 comment:

Matthew said...

The professor from whom I took Corporations liked to use Charleston Boot & Shoe Co. v. Dunsmore, 60 N.H. 85 (N.H. 1880), to illustrate the principal that the board of directors runs company, not the shareholders.

Business Judgment Rule Standard of Review
A. Disinterested Directors
B. Reasonable process
1. Informed
2. Deliberated, considered
C. Merits/substance --> Rational basis for believing that it is in the best interest of the company

Substance of Business Judgment Rule, stated in the negative
A. Personally interested
B. Grossly negligent (Duty of Care aspect of decision)
1. In informing themselves
2. In deciding and deliberating
C. Substance
1. Bad Faith
a. No rational basis (no possible business purpose)
b. Improper primary purpose
c. Waste
2. Bad faith can be shown if no person of ordinary sound business judgment would have believed that the company would have benefited from the decision.