The business judgement rule - approach and application

• Author: Adina Ponta
• Position: Faculty of Law, Babe?-Bolyai University, Cluj-Napoca
• Pages: 25-44

The business judgement rule – approach and application

PhD. student Adina PONTA

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Abstrac t

The busin ess judgmen t rule represents a ce ntral doctrine of corpora te govern ance,

due to its major impl ications on corp orate dire ctors' lia bility a nd to its infl uence o n the

relati onship between shareho lders a nd t he bo ard o f directors. The interpreta tion o f the

Rule as a b ehavioral stand ard or as an „abst ention doctrin e” can determina tively influence

the liabil ity p roceedings agai nst d irectors who acted in consi deratio n of the ir fiduciary

duti es. This paper ai ms at anal yzing the nation al legal provision s of the Busi ness

Judge ment Rul e and the compa tibility of the lega l provision s with t he establi shed

interp retations of the Rule th at can be found in the foreign li teratu re. Absent a case la w

that clarifies de approac hes of the Business Judgement Rule by the na tional courts, the

research analyzes the trad itional Common Law approach es of the Rul e and the obst acles

which hi nder a fai thful transfer o f the Rul e i n Romani a. Th e objecti ve of these

ident ifications is to draw de lege ferenda proposals for an efficien t applica tion of the lega l

provisi ons in th e future. Co nsidering th at this Rule is th e natural co nsequence of trust and

of the powers gra nted to corpora te directors, the co nclusions of the resea rch sug gest

soluti ons for the stabiliza tion of the conti nuous tensio n of th e su preme values of the

corpora te world: auth ority and li ability .

Keywords: Business Judgement Rule, direct ors' liab ility, fiduc iary duti es, duty of

care, Absten tion Doctrine .

JEL Cla ssification: K20, K22, K41

1. Introduction

In the Common Law doctrine and jurisprudence, the directors of a

company owe what the Delaware Supreme Court

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has called ”the triad of fiduciary

duties": duty of care (due diligence and prudence), good faith and duty of loyalty.

These are almost uniformly recognized by the doctrine and jurisprudence as the

standard of fiduciary duties, which are identified and analyzed by shareholders and

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Adina Ponta - Faculty of Law, Babeș-Bolyai University, Cluj-Napoca, pont a.adina@gmail.com.

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Delaware Courts are internationally recognized as t he most p rominent forum for resolving disputes

covering domestic issues of corp orations carrying much of global business. T he efficiency of these

courts, the predictability of rulings, the reliability of professionals on the pronounced rulings and

the continuous exposure to litigation and commercial law issues it is unique in the world. Delaware

Court of Chancery is an equity court and a standard of fairness and professionalism, determining a

huge wave of forum shopping.

Volume 5, Issue 2, December 2015 Juridical Tribune

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by courts when assessing the corporate directors' conduct.

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Although the Business

Judgment Rule comes into play with respect to all these three obligations

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, it is

closely associated with the duty of care. In essence, the duty of care requires

directors to act with the same degree of care that a n ordinary careful and prudent

person would have in similar circumstances. By invoking the phrase "reasonable

care (attention)", the duty of care would be violated every time a director acted

recklessly.

The Business Judgment Rule is the central doctrine of Business Law,

which penetrates and affect the roles of managers, board members and of

shareholders with significant power of control. The doctrines referring to this rule

is among the most heterogeneous institutions, theoretical assertions and the

justification to regulate this Rule are not uniform, nor in Common Law or in

continental European systems and this gap has important theoretical and practical

implications.

In the American and British case law, two approaches of the Business

Judgement Rule are dominant. The first version appertains to the Rule as a standard

of liability by which the courts take an objective examination of the merits of board

decisions. The second interpretation regards this rule as an Abstention Doctrine

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,

pursuant to which courts simply refuse to analyze board decisions in certain

individual cases. The distinctions between the two applications of the Rule has

major consequences. By the second interpretation, for example, it is very likely that

the shareholders' claims against the board of directors will lead to the conclusion of

court settlements

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, affecting decisively the ruling of the courts and the effects on

the parties trying to resolve the dispute.

In line with the evolving case law in the early 2000s, the Business

Judgment Rule was regarded as a standard of analysis based on the corporate

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One of the first express mentions of this triad of fiduciary duties in the manner it is viewed by the

majority doctrine and jurisprudence nowadays is reflected in the justifications of the Case Aronson

vs. Lewis, 473 A.2d 805, 812 (D elaware, 1984).

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The clear separation of this t riad was rather tumultuous, a reference Case is Walt D isney Co.

Derivative Litig. (Disney IV), 907 A.2d 693, 754 (D el. Ch. 2005).The disput e focused on Disney's

board of directors failure to complain with the fiduciary dut ies in connection with determining the

terms of employ ment of the CEO and with his compensation clause at the time of repealing his

mandate absent any fault. T he court concluded that the p rotection of the manager disappears only

when his gross negligence is proved (unint elligent business decisions or t hat lack counseling, lack

of the minimum step s toward information), bad faith, or if the decision cannot be attributed to any

commercially rational p urpose. In these cases, t he manager is the one who will need to actively act

by reversing the burden of proof and showing that he made a fair and equitable decision in for the

company and for the shareholders.

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„Abstention doctrine” is t he older interpretation of the Rule, which is becoming increasingly

pop ular in American corporate case law. This concept was initiated and developed by Professor

Stephen B. Bainbridge, University of California School of Law, one of t he most prominent voices

of corporate governance and fiduciary obligations.

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According to art. 439 of the Civil Procedure Code, t hese transactions can also be concluded in the

Romanian courts.