The Business Judgment Rule (the duty of care)

I review old UBE essays regularly and among the essays testing the subject of Corporations, a significant percentage of them test the business judgment rule.  It's important to know it well.

There are two main duties that directors have when managing the corporation: the duty of loyalty and the duty of care. The business judgment rule relates to both of these duties and this post will focus on the duty of care.

Directors of a corporation have a duty to manage the corporation to the best of their ability, and this obligation entails that they discharge those duties in good faith and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. The standard should remind you of the standard for negligence. Further, the directors must act in a manner that they reasonably believe to be in the best interests of the corporation.

The business judgment rule is a protection of sorts for the directors. Provided they act as outlined above, they will not be liable for corporate decision that in hindsight turn out to be wrong. In addition, it's the burden of the person challenging the directors' action to prove that the standard as outlined above has been not satisfied.

Sometimes, whether the standard has been satisfied could be a close call. It's important to note that in discharging obligations, a director is entitled to rely on information, reports, or statements if they have been prepared or presented by corporate officers or employees whom the director reasonably believes to be reliable. A director is also entitled to rely on the same from legal counsel, accountants, or others as to matters the director reasonably believes to be within the competence of those professionals. Likewise, a director may rely on a committee of the board of directors of which the director is not a member if the director reasonably believes the committee is worthy of trust.