Business Judgment Rule – Shielding the Corporate Director From Personal Liability and Considerations of Efficient and Financially Reasonable Resolutions

Under Florida law, corporate directors owe a fiduciary duty to the corporation and its shareholders, which requires loyalty, good faith, and due care.  The directors’ fiduciary duty has been codified in F.S. §607.0830(1):

A director shall discharge his or her duties as a director, including his or her duties as a member of a committee: (a) in good faith; (b) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) in a manner he or she reasonably believes to be in the best interests of the corporation.

When making business decisions on behalf of a corporation, it is presumed that corporate directors act in compliance with the above-referenced statute, by acting on an informed basis, in good faith and with ordinary care.  This presumption is judicially created and is known as the business judgment rule.   The business judgment rule is based on the premise that directors, for the most part, are more capable of making business decisions than are judges. Thus, where the rule is applicable, corporate directors will not be held liable for decisions made when conducting the business and affairs of a corporation.

Florida case law provides four elements which must be present for the business judgment rule to act as a shield to director liability:  (a) the decision under review must be a business decision; (b)  the director must not receive a personal benefit from the transaction ; (c) the director must exercise due care; and (d) the director must exercise good faith.  F.D.I.C. v. Stahl, 854 F. Supp. 1565, 1570-1571 (S.D. Fla. 1994).

Therefore, the business judgment rule only protects directors only when they are carrying out their duties as directors, (e.g., making decisions and analyzing issues as directors). The business judgment rule is also inapplicable when the director furthers his self-interest.  “A director is considered interested where he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders, or will suffer a detrimental impact from the proposed transaction.”  McCabe v. Foley, 424 F. Supp. 1315 (M.D. Fla. 2006).

Of course, the rule will not shield a director from liability if he or she does not carry out his basic fiduciary duties of loyalty, good faith and informed decision making.  However, a director will not be held to breach the fiduciary duties he owes to corporation and its shareholders when he makes decisions on an informed basis in a good faith belief that the decision will serve the best interest of the corporation.

Stated another way, the business judgment rule under Florida law will adequately shield a director from potential liability no matter how poor his business judgment.  However, poor business judgment coupled with bad faith, fraud, illegality or oppressiveness will lead a court to disturb a board decision and hold directors liable.  Essentially, the policy behind the business judgment rule categorizes directors and protects a “good director,” who makes an honest mistake or has an error in judgment, but not a “bad director” who makes a bad decision and simultaneously breaches his fiduciary duties.

In order to increase the likelihood that a court will find that the directors of your company are protected by the business judgment rule, it is important to address the board’s decision making process when making potentially controversial decisions. Corporate minutes should sufficiently reflect the board’s factual foundation for its decisions, include reports received from outside experts or management, and should illustrate the board’s contemplation of other alternatives.

It is important to realize that though the business judgment rule is a utilized means of shielding a corporate director from potential liability, the protection, which it may or may not afford, often comes with a hefty price tag.  In the real word, use of the business judgment rule as a defense to director liability can prove to be both time consuming and costly.

Money spent on attorneys’ fees, discovery, investigation and experts can lead to towering costs before the trial has even begun.  Also, when a director facing liability cites the business judgment rule as a defense, it is difficult to dispose of a lawsuit prior to trial. Several courts have been resistant to and question dismissing business judgment rule cases in a motion to dismiss.  In addition, Florida state courts are generally disapproving of granting summary judgment in tort cases.

Generally, avenues for more efficient resolution are available.  One such option is mediation.  Agreeing to mediate in the early stages of a dispute, can sometimes lead to resolution at the outset, before everyone involved has invested their time, money and emotional energy in fighting the issues presented by the case.

Noticing a case for trial within 20 days after the defendant answers the complaint can also lead to a more efficient resolution.  When this is done in state court, the trial court will schedule the case for trial in an expedient manner, which will lead to early discovery and pretrial deadlines.

It is also useful to depose parties or key witnesses early rather than later in the dispute.  The discovery of pertinent information in an early deposition, before exorbitant amounts are spent on attorneys’ fees, discovery, investigation and experts, may position a case for early resolution.

Source Reference:  James F. Carroll, The Business Judgment Rule in Florida – on Paper and in the Trenches, Fla. B.J. 80, 7 July, 2006.

By:  Emily C. Williams, Esq.