|
THE BUSINESS JUDGMENT RULE
VI. THE BUSINESS JUDGMENT RULE
Directors are expected to use their best judgment in guiding
corporate management, but they are not insurers of business
success. Honest mistakes of judgment and poor business decisions
on their part do not make them liable to the corporation for
resulting damages. This is the business judgment rule. The
rule immunizes directors and officers from liability when
a decision is within managerial authority, as long as the
decision complies with management's fiduciary duties and as
long as acting on the decision is within the powers of the
corporation. Consequently, if there is a reasonable basis
for a business decision, it is unlikely that the court will
interfere with that decision, even if the corporation suffers
thereby.
To benefit from the rule, directors and officers must act
in good faith, in what they consider to be the best interests
of the corporation, and with the care that an ordinarily prudent
person in a like position would exercise in similar circumstances.
This requires an informed decision, with a rational basis
and with no conflict between the decision maker's personal
interest and the interest of the corporation.
To be informed, the director or officer must do what is necessary
to become informed: attend presentations, ask for information
from those who have it, read reports, review other written
materials such as contracts_in other words, carefully study
a situation and its alternatives. To be free of conflicts
of interest, the director must not engage in self_dealing.
For instance, a director should not oppose a tender offer
(an offer made by another company directly to the shareholders
(homeowners) (homeowners) to purchase shares in the company)
in the corporation's best interest because its acceptance
may cost the director his or her position. For a decision
to have an apparently rational basis, the decision itself
must appear to have been made reasonably. For example, a director
should not accept a tender offer with only a moment's consideration
based solely on the market price of the corporation's shares.
The business judgment rule is an American case law-derived
concept in Corporations law whereby the "directors of
a corporation . . . are clothed with [the] presumption, which
the law accords to them, of being [motivated] in their conduct
by a bona fide regard for the interests of the corporation
whose affairs the stockholders have committed to their charge"[1]
and whereby a court will refuse to review the actions of a
corporation's board of directors in managing the corporation
unless there is some allegation of conduct that the directors
violated their duty of care to manage the corporation to the
best of their ability. Given that the directors are not insurers
of corporate success, the business judgment rule specifies
that the court will not review the business decisions of directors
who performed their duties (1) in good faith; (2) with the
care that an ordinarily prudent person in a like position
would exercise under similar circumstances; and (3) in a manner
the directors reasonably believe to be in the best interests
of the corporation. As part of their duty of care, directors
have a duty not to waste corporate assets by overpaying for
property or employment services. The business judgment rule
is very difficult to overcome and courts will not interfere
with directors unless it is clear that they are guilty of
fraud or misappropriation of the corporate funds, etc.
In effect, the business judgment rule creates a strong presumption
in favor of the Board of Directors of a corporation, freeing
its members from possible liability for decisions that result
in harm to the corporation. The presumption is that "in
making business decisions not involving direct self-interest
or self-dealing, corporate directors act on an informed basis,
in good faith, and in the honest belief that their actions
are in the corporation's best interest."[2] In short,
it exists so that a Board will not suffer legal action simply
from a bad decision. As the Delaware Supreme Court has said,
a court "will not substitute its own notions of what
is or is not sound business judgment" (Aronson v. Lewis,
473 A.2d 805, 812 (Del. 1984)) if "the directors of a
corporation acted on an informed basis, in good faith and
in the honest belief that the action taken was in the best
interests of the company." (Sinclair Oil Corp.
v. Levien, 280 A.2d 717, 720 (Del. 1971))
|
