In 1742, the Lord Chancellor of England noted that:
[Directors] are most properly agents to those who employ them in this trust, and who empower them to direct and superintend the affairs of the corporation. In this respect they may be guilty of acts of commission or omission, of malfeasance or nonfeasance. Now where acts are executed within their authority, . . . though attended with bad consequences, it will be very difficult to determine that these are breaches of trust. For it is by no means just in a judge, after bad consequences have arisen from such executions of their power, to say that they foresaw at the time what must necessarily happen; and therefore, were guilty of a breach of trust.1
This recognition that directors should not be held personally liable for honest business decisions that result in negative consequences has continued to be a bedrock of corporate law.2 In modern times, this and other policy goals have been secured by the implementation of the business judgment rule.3Under the business judgment rule, board decisions are not second guessed by courts so long as they are made on an informed basis, in good faith, and in the honest belief that the actions taken are in the best interest of the company.4 This approach has served its purpose well up to now, but one recently introduced wrinkle has yet to be addressed.

Continue Reading