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Business Judgment Rule: Directors and Officers May be Held to a Fiduciary Duty of Care.

On Behalf of | Dec 1, 2021 | Corporation & Company Law, Firm News |

Directors and officers owe a fiduciary duty to the corporation and, by extension, its shareholders. The duty of care requires directors and officers to act in as competent a manner as would reasonably prudent people in their positions. Officers and directors must make decisions that they believe, in good faith, to be in the best interests of their companies and must make decisions after appropriate research and due diligence inquiries. The decisions must be the products of appropriate care and thought.

In another example, the New Jersey statute defining a director’s standard duty of care states: “Directors and members of any committee designated by the board shall discharge their duties in good faith…”.  Officer and directors who fail to uphold their duties of care can be subject to shareholder lawsuits, including shareholder derivative actions, for any damages caused by these failures. These lawsuits, which can subject officers and directors to heavy monetary liability, are very powerful tools to penalize derelict directors. This is evident from high-profile shareholder derivative suits that have been brought against directors of many major corporations, including Apple, Citigroup, Walt Disney, and Enron, wherein shareholders have successfully challenged activities of boards of directors.

The business judgment rule is a standard of judicial review of corporate director and officer conduct. As corporate responsibilities are typically governed by state law, there is no one uniform definition of the “business judgment rule” that applies throughout the country. In fact, its inconsistent and uncertain approach across jurisdictions has led to its being called “the most enigmatic doctrine in corporate law.”  Careful consideration of actions taken by directors and officers must be viewed on a state-by-state and case-by-case basis.