The business judgement rule - approach and application

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

The business judgment rule represents a central doctrine of corporate governance, due to its major implications on corporate directors' liability and to its infl uence on the relationship between shareholders and the board of directors. The interpretation of the Rule as a behavioral standard or as an "abstention doctrine"can determinatively influence the liability proceedings against directors... (see full summary)

The business judgement rule approach and application
PhD. student Adina PONTA
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
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
Adina Ponta - Faculty of Law, Babeș-Bolyai University, Cluj-Napoca, pont
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
by courts when assessing the corporate directors' conduct.
Although the Business
Judgment Rule comes into play with respect to all these three obligations
, 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
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
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
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
, 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
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).
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.
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.
According to art. 439 of the Civil Procedure Code, t hese transactions can also be concluded in the
Romanian courts.

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