Overcoming the Business Judgment Presumption in American Corporation Law. An Analysis of the Business Judgment Rule and it's Raison d'être

Abstract

Taking business decision is a risky business. When conducting their tasks, corporate decision makers will have to make decisions that involve the balancing of risks and benefits for the corporation. It is more or less inevitable that some of these decisions will turn out to be detrimental to the corporation. The prevalent opinion (in courts and elsewhere) has therefore been that it would be unfavorable if good-faith business judgment was to be re-examined, with the favor of hindsight, by courts. The business judgment rule, an overarching and rebuttal presumption shielding American corporate decision makers from personal liability and insulating directorial decision-making from judicial review, has for a long period of time served this purpose.

This thesis will explain and examine both the business judgment rule as such and how the rule is developing over time. By reviewing the In re Walt Disney Co. Derivative Litigation and Smith v. Van Gorkom, the debates that these cases led to and the ultimate consequences of these cases, this thesis will argue that courts should reconstrue the business judgment rule. The judicial re-examination of for example decisions constituting apparent business folly (such as in Schlensky v. Wrigley) and decisions which a corporate manager should be able to understand to be detrimental to the corporation (such as Michael Ovitz’s non-fault termination provisions in the In re Walt Disney Co. Derivative Litigation), should not be too lenient because of the court’s favor of hindsight. Corporate decision makers should be able to foresee the consequences of their decisions in these cases and courts should be less willing to forgive the decision makers.

This thesis will commence at a basic level by explaining and discussing agency problems, fiduciary duties (mainly the duty of care) and executive compensation. The thesis will therefore also serve as an introduction to some parts of American corporation law.