To understand the business judgment rule, it may be helpful to start by providing a refresher on what it means to be a director or officer of a corporation.
Who is an Officer or Director of a Corporation
Under Texas law, officers of a corporation shall include the president and secretary. Officers may also include one or more vice president, treasurer or other officers and assistant officers as considered necessary. The officers of a corporation may be designated by other additional titles as provided by the formation documents or bylaws of the company.
The business affairs of a corporation are managed through a board of directors. Directors are therefore officers of a corporation.
Directors and officers owe a fiduciary duty to their corporations in the actions they take as directors and officers. A director’s fiduciary status creates three broad duties: duties of obedience, loyalty, and due care.
So What Exactly is the Business Judgment Rule?
The business judgment rule is designed to protect corporate officers and directors from being held liable to the corporation for alleged breaches of duties based on actions that are negligent, unwise, inexpedient, or imprudent if those actions were within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.
The business judgment rule is perhaps the most common and potent affirmative defense that officers and directors assert when defending allegations of breach of fiduciary duties that result in injury to the corporation. Although the breadth of the business judgment rule is quite expansive, there are exceptions to the rule that still make it possible to hold directors and officers accountable. Additionally, even if the business judgment rule serves as a defense for the directors and officers, it does not affect the liability of the corporation for acts or omissions of the officer(s). In other words, you may still be able to hold the corporation liable—even if the officers and directors cannot be held personally liable.
Exceptions to the Business Judgment Rule
There are a number of notable exceptions to the business judgment rule. The application of an exception and indeed the application of the business judgment rule is case specific.
- The business judgment rule will not apply if the board commits an ultra vires act by taking actions beyond their authority.
- It will also not apply if the board takes actions that are illegal or against public policy.
- The business judgment rule will not apply if the board committed fraud, corporate waste, engaged in self-dealing, made decisions influenced by a conflict of interest, acted in bad faith or with a corrupt motive, or breached the duty of due care by reaching their decision through a grossly negligent process that included the failure to consider all material facts.
- It will not apply if the director breaches the duty of loyalty by failing to discharge that fiduciary obligation in good faith.
Overcoming a Business Judgment Rule Defense | Find a Business Litigation Lawyer
If you need more information on the business judgment rule, or if you need to overcome a business judgment rule defense, it is important that you contact an experienced business and commercial litigation law firm with expertise in prosecuting business disputes including shareholder cases. At Anunobi Law, our attorneys are skilled in handling complex business and commercial litigation cases including cases involving business judgment rule defenses.
Anunobi Law serves clients involved in business and commercial litigation cases all over Texas including Houston, Sugar Land, The Woodlands, Cypress, Richmond, Missouri City, Harris County, Fort Bend County, and Montgomery County.
Contact us at: (832) 538-0833
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