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9 Cards in this Set
- Front
- Back
Business Judgment Rule
BJR = |
Rebuttable presumpt = directrs performing their functions are honest & decisions = informed & rationally based
Rationale = a.)Encourages risk-taking – w/o rule, directors may be too cautious b.)Avoids judicial meddling – Judges not busin experts; deriv suit P’s may have intent at odds w/interests of corp & SH’s c.)Encourages directors to serve – fear liability exposure; encourages qualified indivs to become directors & take business risks w/o fear of judgment in hindsight |
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Business Judgment Rule
(Overcoming the BJR Burden) |
Burden on challenger of BOD to overcome BJR presumption by proving either:
1.)Lack of Good Faith 2.)Lack of rational business purpose (waste) 3.)Gross Negligence in Duty to Supervise and Become Informed |
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Business Judgment Rule
(Overcoming the BJR Burden - Lack of Good Faith |
BJR presump lost if:
(1) Fraud - director acted fraudulently = liable and actions tainted by fraud invalidated (2) Conflict of Interest - If director pers. interest in corp action b/c personal or financial benefit (3) Illegality - If illeg behav. or intentional ignorant of illeg. BJR presump. lost even if dirs informed & action benefits corp |
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Business Judgment Rule
(Overcoming the BJR Burden - Lack of rational business purpose (waste)) |
Even decisions that in hindsight seem unwise or imprudent protected so long not:
1.)“Improvident beyond explanation” 2.)“Removed from the realm of reason” |
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Business Judgment Rule
(Overcoming the BJR Burden - Gross Negligence in Duty to Supervise and Become Informed) |
Directors must take reasonable efforts to inform themselves in making the decision
Focus is on the procedure and the courts assume diligent board deliberations ensure rational board action |
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Business Judgment Rule
(Duty of Care - Reliance on Info Sources) |
Directs can rely on info & advice from other direcs, e.g., committees, competent offics, emplyees & experts
Direcs must be familiar w/info/advice & must reasonab believe it merited confidence Can’t claim reliance if knew/ suspicious of source |
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Business Judgment Rule
(A director or officer who makes a business judgment in good faith fulfills the duty of care if) |
a.Made the Decision (Proc decision - i. Decision must’ve been made the director
b. In Good Faith – Uninterested in the transaction (Proc Std) c. On Informed Basis – Reasonably informed (Proc Std) d.Honest Belief That Action Was In Corp’s Best Interest (Sub Std) |
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Business Judgment Rule
(Informed Basis) |
1.)judgment is informed if direcs informed themselves of all material infor reas avail
2.)To rely on report by officer /director /expert, must be relevant & otherwise be entitled to good faith, not blind reliance 3.)w/o other sound valuation info, a premium alone doesn’t =adeq basis to assess fairness of offering price |
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Business Judgment Rule
(Failing the Business Judgment Rule – Entire Fairness Test) |
If direcs fail 1 of factors of BJR, then “Entire Fairness Standard” applies. Direcs have burden proving transact entirely fair to corp &SH’s
a.)Was the price fair and were their fair dealings? b.)Much harder standard for the board to prove |