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Officers and directors have a fiduciary duty to protect the interests of the corporation and act in the best interests of its shareholders.  Guth v. Loft. fuc., 5 A.2d 503, 510 (Del. 1939).  Where a director is charged with breach of his or her fiduciary obligations, the ‘business judgment’ rule is utilized.  Horowitz v. Southwest Forest Indus., 604 F. Supp. 1130, 1134 (D. Nev. 1985)  The business judgment rule applies to protect managers of limited liability companies just as it does to protect directors of corporations.  Froelich v. Erickson, 96 F. Supp. 2d 507, 520 (D. Md. 2000).

Simply stated, the business judgment rule “bars judicial inquiry into the actions of corporate directors taken in good faith and in the exercise of honest judgment in lawful furtherance of corporate purposes.”  Id.  However misguided the business decision may be, the rule protects directors from judicial review of the wisdom of that decision.  See Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989) (protecting Board decision for an arguably lower offer for the company).

The protections afforded under the business judgment rule consist in part of the “presumption that the acts of corporate directors are honest and in the best interests of the company.”  Horowitz, 604 F. Supp. at 1135 (citing Foster v. Arata, 74 Nev. 143, 325 P.2d 759,764 (1958)). “The business judgment rule postulates that if directors’ actions can arguably be taken to have been done for the benefit of the corporation, then the directors are presumed to have been exercising their sound business judgment rather than to have been responding to self-interest motivation.” Id. (citing Whittaker Corp. v. Edgar, 535 F. Supp. 933, 950 (N.D. lll. 1982)). For this reason, “[t]he burden of showing bad faith or abuse of discretion rests upon the plaintiff.”  Id. (citing Treadway Co., Inc. v. Care Corp., 638 F.2d 357, 381 (2d Cir. 1980)). Furthermore, the burden requires a showing of gross negligence.  Cede & Co. v. 21 Technicolor, Inc., 634 A.2d 345, 364 n.31 (Del. 1993).

According to the Delaware Supreme Court, the business judgment rule operates as a procedural guide and as a substantive rule of law.  Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989). “As a rule of evidence, it creates a ‘presumption that in making a business decision, the directors of a corporation acted on an informed basis i.e., with due care, in good faith and in the honest belief that the action taken was in the best interest of the company.”‘  Id. (quoting Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984)).  “The presumption initially attaches to a director-approved transaction within a board’s conferred or apparent authority in the absence of any evidence of ‘fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment.”‘ Id. (quoting Grabow v. Perot. Del. Supr., 539 A.2d  180, 187 ( 1988)). The mere receipt of compensation or salary and other common perquisites does not make a manager self-interested to lose the protections under the business judgment rule.  In re E.F. Hutton Banking Practices Litigation, 634 F.Supp. 265,271 (S.D. N.Y. 1986). Otherwise, all management would be self-interested.27   Poland v. Caldwell, 1990 WL 158479, at *4, Civ. A. 10 Nos. 89-645, 89-1255 (E.D. Pa. 1990).

“If the proponent fails to meet her burden of establishing facts rebutting the presumption, the business judgment rule operates as a substantive rule of law and will protect the directors and the decisions they make.”  Citron, 569 A.2d at 64 (citing Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. Sup. 1985)).  Conversely, if the presumption is successfully rebutted, the fiduciary is entitled to prove ‘entire fairness’ of his actions as a product of fair dealing under the business judgment rule.  Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).

 

See elements for other claims at the Nevada Law Library

About the Author

Jay Young is a Las Vegas, Nevada attorney. His practice focuses on business law, business litigation, and acting as an Arbitrator and Mediator. Peers have named him an AV-Rated Lawyer, Best Lawyers, a Top 100 Super Lawyers in the Mountain States multiple years, and to the Legal Elite and Top Lawyers lists for many years. Mr. Young has been appointed a part time Judge, a Special Master to the Clark County, Nevada Business Court, as an arbitrator by the Nevada Supreme Court. He has been appointed as an arbitrator or mediator of well over 250 legal disputes from business disputes to personal injury matters. He has been named Best Lawyers for Arbitration. Mr. Young is a respected author of ten books, including A Litigator’s Guide to Federal Evidentiary Objections, A Litigator’s Guide to the Federal Rules of Evidence, and the Federal Court Civil Litigation Checklist.
Mr. Young can be reached at 702.667.4868 or at jay@h2law.com.