The Business Judgment Rule

follow the grading rubric and also use the concepts from chapter 21.

CHAPTER 21: KEY CONCEPTS AND TAKEAWAYS

I need to understand what is involved in the incorporation process and the related requirements for a company to incorporate a business.

I need to understand the pros and cons of the corporate form as compared to other types of businesses.

I need to understand the difference between a domestic and foreign corporation.

I need to understand the duties that management owes to the corporation and shareholders.

I need to understand the Business Judgment Rule and when it applies.

Management Duties

Fiduciary Duty

Owed by officers and directors to the corporation and shareholders

Relationship is one of trust

Two key aspects

Duty of Loyalty:

Duty to avoid self dealing

Duty to share corporate opportunity (i.e., not to take it on the side for yourself)

Duty of Care:

a duty to act in the best interests of the corporation, and

to use the same level of care that an ordinarily prudent person would use in a similar situation

Business Judgment Rule (BJR)

Rule: If fiduciary duties met, courts will not:

Second guess good faith business decisions, or

Hold managers personally liable for any harm that results

Main Goals:

Allows managers to do their jobs

Keeps judges out of corporate management

Encourages directors to serve

Under the BJR, Managers are NOT Liable for Decisions Made:

In good faith

For a lawful purpose

Without a conflict of interest

To advance the best interests of the corporation

With the care that an ordinarily prudent person would take in a similar situation