BJR: Why the Deferential Treatment for Business Decisions?

When directors make decisions in their official capacity, they are given very deferential treatment so long as the decisions are made by someone who is not interested in the subject, is well-informed, and rationally believes the business judgment is in the best interest of the corporation.  Courts have spent a great deal of time enunciating such a policy that gives directors an almost free hand in their decisions.  It is important to understand and take note of what courts emphasize when dealing with directors’ decisions.

The main reason courts are deferential in their treatment of a director’s decisions is the hindsight bias.  Perfectly rational and thought out decisions can be made, but lead to disastrous results. Because nobody can predict the future, courts tend to not disturb a director’s decisions unless it is clear that the procedure that went into the decision was wrong.  Even so, inattentive directors will only be liable if led to losses.  Because hindsight is always 20-20, courts tend to not disturb a director’s decisions unless there was an egregious error.

The next reason for the business judgment rule is the fact that the court may not be as astute in a business decision as the director who undertook it.  Directors are more educated in their lines of business, and therefore have the right tools to make proper decisions that courts do not have available to them.

Another reason for the business judgment rule is it used to ensure that directors are not deterred in making decisions in their capacity.  Because the business judgment rule ensures directors are not liable for ordinary decisions, directors will not be deterred in making decisions on behalf of the company, therefore ensuring smooth operation.  It also will not deter more qualified individuals from becoming directors, who may look elsewhere for a position if they would otherwise be so exposed to liability.

The business judgment rule believes that there has been voluntary acceptance of a director’s actions because the shareholders voluntarily invest in a corporation with these directors.  Because shareholders have the options of choosing the directors to represent them, they are in essence acquiescing to most of a director’s actions.  Shareholders are free to invest elsewhere if they are unhappy with the actions of their director.

Because there are so many policy reasons for the business judgment rule, courts are hesitant to second guess a director’s decisions, which is why the business judgment rule covers many transactions and is very deferential.  However, there are certain areas where the business judgment rule will not apply.  Consulting with the right legal team can ensure the directors of your corporation are making proper decisions in line with their position.  Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.