Business Judgement Rule for Board Directors

October 23, 2013. You serve on the Board of Directors, receive the Board packet in advance of the meeting and you make motions and generally pay attention. Then the agendas get controversial and debate ensues. The employees are not performing, there is fraud, the financials are not adding up, another director is self dealing, the competitor is taking a bite out of sales- since companies are run by people the scenarios are endless that lead you to be concerned about the company, and consequently your role in the troubles. So what is a Board member's exposure to liability? You should not put your head in the sand and avoid the issues. At the same time, avoid the added anxiety and understand the business judgment rule and your duty of care. Courts use the business judgment rule to create a presumption that the Directors acted in the best interest of the Company. The following test was constructed in the opinion for Grobow v. Perot, by the Delaware Court in 1988 as a guideline for satisfaction of the business judgment rule.

Directors in a business should:

• act in good faith;
• act in the best interests of the corporation;
• act on an informed basis;
• not be wasteful;
• not involve self-interest (duty of loyalty)

So, open your Board packet in advance, pay attention, ask questions, demand answers, be knowledgable about finance, keep the bottom line in mind and the profitability of the company, and think of the company before your own personal dealings. If you want to vote in your best friend as President and give her a mega bonus make sure she is qualified first. If you are going to buy the company property be sure to do so at fair market value and do not vote on the transaction and raise your conflict before the vote. Keep the guidelines in mind and you can rest easy that as a Board member you do not ensure corporate success and Courts hate to get involved in business decision making.