Shareholder Obstacles Under the Business Judgment Rule

Previously on our blog, we described what information members of a corporation’s Board of Directors can rely on in discharging their duties and explained how they can use the Business Judgment Rule (“BJR”) as a defense to liability imposed in the event of an alleged breach of their duty of care. The use of the BJR as a defense by directors creates an obstacle to shareholders attempting to hold directors personally liable for a breach of the duty of care. Under the BJR, courts will not review directors’ business decisions if the directors were disinterested, acting in good faith, and reasonably diligent in informing themselves of the facts. Shareholders must show directors have not met those requirements in order for courts to evaluate the directors’ business decision.

Shareholders may show that directors are not disinterested by proving that the director(s) have a personal interest in the corporate decision underlying the dispute. However, under California law, it is unclear what amount of personal interest is necessary to find directors interested in a corporate decision.

Arguably the toughest element for shareholders to overcome, courts generally will assume disinterested directors acted on an informed basis and with the honest belief that their decision was in the best interest of the company. This presents an even further obstacle; if a court does find directors did not act in good faith, shareholders must show more than ordinary negligence. In other words, it is not enough for shareholders to prove directors did not act as reasonably prudent people.

Thus, although the Business Judgment Rule presents an obstacle for shareholders challenging decisions made by a corporation’s Board of Directors, the obstacle may be overcome on a case-by-case basis.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims, including claims involving the business judgment rule. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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