Philadelphia Business Litigation Attorneys: Boards of Directors Benefit from Presumption of the Business Judgment Rule

Generally, a corporate board of directors has a fiduciary duty of care due to their power, authority, and responsibility in managing the business affairs of the corporation. However, directors also have the protection of the Business Judgment Rule. This Rule provides for judicial presumption that directors have acted in accordance with their fiduciary duties of care, loyalty, and in good faith. Some policy reasons for this is to deter frivolous lawsuits and to encourage individuals to serve on the board.

The Business Judgment Rule can be rebutted if the plaintiff pleads, with particularity, that the Board of Directors failed to act:

1) In good faith;

2) In an informed manner (i.e., grossly negligent);

3) Without a conflict of interest; or

4) With the honest belief that its actions are in the best interest of the company

If a plaintiff can successfully prove one of those four elements to rebut the Business Judgment Rule, the burden then shifts to the board of directors to prove that their decision was both fair and reasonable (i.e., the entire fairness test of Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) which comprises fair price and fair dealing).

In deciding fair price and fair dealing, the courts will simply look to market value when deciding if the price was fair. In order to prove that the Board dealt “fairly”, candor and disclosure is of the utmost importance. Other factors to consider are 1) when the transaction was timed; 2) how it was initiated, structured, negotiated, and disclosed to directors; and 3) how the approvals of the directors and the stockholders were obtained.

For more information, call Philadelphia business litigation attorneys at Sidkoff, Pincus & Green at 215-574-0600 or contact us online.