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9 Cards in this Set

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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
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
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
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”
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
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
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)
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
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