Pg 33 Flashcards
What is the business judgement rule?
A standard applied to business decisions of directors and officers that provides a rebuttable presumption that the corporation’s business decisions were made by disinterested and independent directors, acting on an informed basis, and in the good faith belief the decisions are in the best interest of the corporation and its shareholders. Unless this can be rebutted, courts will dismiss lawsuits that challenge a board’s business decisions.
How can the business judgement rule be overcome?
By showing the directors violated their fiduciary duties.
What is the reasoning for the business judgement rule?
Directors make lots of decisions and some turn out not to be smart, but you cannot make directors pay for every business mistake. Although shareholders should be able to hold directors responsible when they have been unacceptably careless, reckless, have acted in self interest, or failed to do their jobs. If directors breach their duty of loyalty or duty of care, the business judgement rule cannot protect them, but if they do not breach either, they are protected
In a nutshell, what is the duty of loyalty and the duty of care?
- loyalty: directors cannot put their own interests ahead of the corporation’s or the shareholder’s
– care: directors must act in good faith on the basis of adequate information as they manage the corporation
Who does the business judgement rule apply to?
Both directors and officers
What are the elements of the business judgement rule?
– business decision
– good faith
– made by disinterested and independent directors
– with due care
What is involved in the element of the business judgement rule that says there must be a business decision?
It must involve a conscious exercise of judgement in making a decision which involves the corporation’s lawful business. This doesn’t protect decisions that involve fraud, illegality, or ultra vires acts.
Is it possible to challenge a board’s inaction under the business judgement rule?
Yes. Although the directors and officers are still protected if it was a reasoned judgement not to act and not just a failure to act.
If a corporation gets a report from the plant that working conditions are bad and may violate state safety standards, then the board has a meeting and discusses it and decides that the conditions do not violate the law, so they do nothing, does that violate the business judgement rule?
No, because this is a decision about the law, not a business, so because it doesn’t have to do with a business decision it has nothing to do with the business judgement rule.
What is involved in the element of the business judgement rule that calls for good faith?
In order to be protected by the business judgement rule, the decision had to have been in good faith and an honest belief that it was in the best interest of the corporation and its shareholders. If actions are motivated by any purpose besides the corporation’s best interest, then the officers and directors are acting in bad faith.
What are examples of bad faith for the business judgement rule?
– director’s actions were primarily motivated by a desire to stay in a position of control
– the board mislead shareholders by withholding material information from them
– inexplicable gross disparity between the price paid for assets and their market value
– actions that are outside of the bounds of reasonable judgement
What is involved in the element of the business judgement rule that says the decisions must be made by disinterested and independent directors?
This ensures that directors won’t have personal, financial, or other interests in transactions under consideration.
What does “interested” mean with regard to the business judgement rule?
If the director gets a benefit from the transaction that isn’t shared equally by the shareholders of the corporation and isn’t motivated solely by a desire to advance the best interest of the corporation.
What is an example of a director or officer being interested in something?
If it benefits his family member
If there is a nine member board and five of those members are “interested“ directors, can you still get the protection of the business judgement rule?
Yes, if a majority of the disinterested independent directors vote to approve it in a reasonable good faith belief that it is in the best interest of the corporation and its shareholders. I.e.: if three of the four remaining directors that are disinterested approve it, then you can get the protection of the business judgement rule
