The Rule that Isn't a Rule - the Business Judgment Rule

Abstract

On a doctrinal basis, few areas of corporate law are more confused then the duty of care applicable to corporate officials and its handmaiden, the business judgment rule. The tendency of many scholars and practitioners has been to collapse the duty of care into the business judgment rule, as Professor Stuart Cohn pointed out more than a decade ago. The business judgment rule is a separate legal construct that is related to, but separate from, the duty of care and one which protects only proactive and not somnambulant directors and officers. The business judgment rule stays at center stage for several reasons. One reason is that the number of instances at which the rule is encountered, ranging from pedestrian business decisions to adoption of takeover defenses and dismissal of derivative litigation, continues to grow. Another is the level of foreign interest in this wholly American invention. Australia has codified a version of the American business judgment rule in its corporation law. Working groups in other nations have expressed interest in doing the same. This article gives a doctrinal schematic for understanding what the business judgment rule is, and what it is not.