A Decision Theory Approach to the Business Judgment Rule: Reflections on Disney, Good Faith, and Judicial Uncertainty

Abstract:     
This Article presents an institutional choice perspective on the judicial role in enforcing corporate law, in light of the Delaware Supreme Court's recent formulation of a fiduciary duty of good faith. The Court's Disney decision allows for the possibility that director decisions will be reviewed under a more stringent standard of review than the traditional business judgment rule. This Article argues that shifting the standard of review could dramatically alter the courts' role in policing board misconduct. Furthermore, it suggests that courts do not have access to sufficient empirical data to calculate an ideal balance between board accountability and board authority. It is impossible to reliably weigh the complex variables that are relevant to this balance. Given this uncertainty, this Article then uses decision theory to suggest that the business judgment rule standard - a rational basis test - is the most reasonable means for courts to review unconflicted director conduct.

Number of Pages in PDF File: 77

Keywords: Business judgment rule, Disney, good faith, fiduciary duty

Accepted Paper Series