Outline of the Business Judgment Rule
- 1. The Underlying Duties:
- A. The Duty of Care:
- — a “reasonable director” or “reasonable person” negligence rule.
- — similar to the duty an agent owes its principal
- — found in most of the statutes. (E.g., RMBCA § 8.30)
- B. The Duty of Loyalty:
- — far less that the duty of a fiduciary and possibly less than the duty an agent owes its principal
- — Not a bar on self-interested or conflict of interest transactions (unlike trust law)
- — transactions must be “entirely fair”
- C. To whom are these duties owed?
- — “The corporation and its shareholders” or “the corporation”
- — Enforceable by shareholders in a derivative action
- — Sometimes enforceable by creditors of an insolvent firm (see Francis)
- 2. The Business Judgment Rule:
- A. A court will NOT examine whether the Duty of Care or the Duty of Loyalty have been breached, unless the Business Judgment Rule doesn’t apply.
- B. A presumption that the board and officers have exercised business judgment to make a reasonable decision on behalf of the corporation and, therefore, that the Duty of Care and Duty of Loyalty have not been breached.
- C. Usually NOT found in the statutes.
- 3. The Exceptions to the Business Judgment Rule: When it will not apply
- A. Fraud, Deception, Deliberate Malfeasance, Grossly unfair transactions.
- B. Failure to exercise judgment at all: failure to inform oneself, failure to consider, failure to deliberate
- — Not a negligence rule
- — Sometimes described as a gross negligence rule
- — Seems largely procedural
- C. Self-interested transactions
- a. Directors profiting from their position are NOT entitled to the protections of the BJR.
- — usually held to apply ONLY to the individual director who is profiting
- — ordinarily, a board may ratify self-interested transactions by vote of the non-interested directors and that transaction WILL be entitled to the BJR presumption.
- b. Grossly unfair transactions, fraud and so on defeat the BJR presumption.