May 30, 2013 Articles

Breaking Down the Business-Judgment Rule

A defense to shareholder derivative suits against corporate directors for breach of fiduciary duty

by Lindsay C. Llewellyn

In the wake of corporate bankruptcies, government bailouts, and shareholder losses resulting from the economic downturn of 2008, shareholders are increasingly turning to derivative suits in an effort to hold someone responsible for their financial losses. Corporate directors stand in a fiduciary relationship of trust and confidence with the corporation and its shareholders.  As fiduciaries, corporate directors owe the corporation and its shareholders fiduciary duties of diligence and fidelity in performing their corporate duties. These fiduciary obligations include the duty of care and the duty of loyalty. "In essence, the duty of care consists of an obligation to act on an informed basis; the duty of loyalty requires the board and its directors to maintain, in good faith, the corporation's and its shareholders' best interests over anyone else's interests."  Shoen v. SAC Holding Corp., 137 P.3d 1171, 1178 (Nev. 2006) (citing Cede  & Co. v. Technicolor, Inc., 634 A.2d 345, 360-61 (Del. 1993)).  

In bringing shareholder derivative suits, shareholders seek to impose liability on corporate directors for failing to carry out their corporate duties in accordance with this standard of care.  An important and powerful defense to such derivative suits lies in the common law "business- judgment rule."

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