Business Judgment Rule – Board of Directors
Board of directors must tread carefully and maintain diligence to uphold their fiduciary duties toward the corporation and stockholders.
Business Judgment Rule
Business Judgement Rule (BJR) is a presumption that directors, by default, act while (1) sufficiently informed, in (2) good faith, and with (3) an honest belief that they have the best interest of the corporation and stockholders in mind. This presumption can only be rebutted if a director did not meet the three elements; additionally, if BJR applies to the majority of a corporation’s board of directors, a breach of fiduciary duty can only be established if gross negligence or corporate waste can be proven.
Note that transactions questioned due to conflict of interest cannot be protected by BJR; under such dilemma, the Enhanced Scrutiny evaluation is adopted where the board’s conducts are more strictly analyzing in determining whether fiduciary duties were breached. Enhanced Scrutiny standard is usually embraced as an emergency measure to prevent further harming impacts upon stockholders.
Entire Fairness
The Entire Fairness standard is the harshest in evaluating potential breach of duty. The evaluation is conducted under two factors: whether the transaction involved (1) fair dealing and (2) fair price.
Fair Dealing
Fair dealing determines whether the negotiation was properly conducted, structured, fully transparent, and approved by stockholders and the board among other elements.
Fair Pricing
Fair pricing assesses the financial and economic aspect of the transaction. Directors can generally be found liable if they (1) approved the transaction in question in bad faith or (2) if they took part in the transaction and was not disinterested or independent.