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Authors

Lori McMillan

Abstract

The business judgment rule is a judicially created doctrine that protects directors from personal civil liability for the decisions they make on behalf of a corporation. In today’s era of corporate scandals, global financial meltdowns, and directorial malfeasance, it has become especially important in setting the bar for when directors are appropriately responsible to shareholders for their actions. Traditionally the business judgment rule has been regarded as a standard of liability, although it has never really been explored or enunciated as such. This view determines eligibility for business judgment rule protection of a directorial decision after an examination of certain preconditions. An alternate view has developed that posits the business judgment rule is actually an abstention doctrine, and should be applied automatically absent the establishment of the same preconditions as the liability standard approach, only to be used as nullifying factors, to shield directors from having to account. The difference between the two positions essentially comes down to the order of the requirements, and who has the burden of establishing the existence of the factors that would grant or deny business judgment rule protection.

This Article disagrees with both of the above approaches, and instead explores the business judgment rule as a type of immunity by comparing it to selected public and private immunities. The policy underpinnings of the business judgment rule mirror those of immunities, as does the practical impact. This means that the business judgment rule, properly construed, would require the director to establish entitlement to protection by proving that all preconditions for application of the rule are met. Much of the confusion between the courts and circuits could be alleviated by approaching the business judgment rule as a type of immunity, where the procedures and philosophies are much more enunciated. This helps place the business judgment rule back as a crucial part in the balancing act between directorial autonomy and accountability, which is especially timely given the current economic climate.

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