22 Pages Posted: 2 Apr 2007
Courts are confusing the Business Judgment Rule with the standard of care that governs the conduct of corporate directors and officers. The Supreme Court of Alaska declared in recent dictum that the Business Judgment Rule has been codified in section 10.06.450(b) of the Alaska Statutes, the directors' duty-of-care statute. The court deviated from well-established principles of corporate law by confusing the corporate directors' statutory standard of care with the Business Judgment Rule, a widely-applied, but uncodified common law rule about the standard of directors' liability for their mistakes.
Courts in Alaska and elsewhere have conflated the statute's standard of care with the common law's Business Judgment Rule. The former is an ex ante measuring stick by which directors' decisions are guided; the latter is a presumption of correctness and a safe harbor that protects business decisions from ex post review in the courts.
This article identifies a common error of law, describes the difference between these two concepts, explains why many state and federal courts across the nation are confused, and credits the few courts that already have discovered the error. It concludes with some of the reasons why the Business Judgment Rule should not be codified.
Keywords: corporate governance, business judgment rule, standard of care, director's liability, duty of care, fiduciary duty
JEL Classification: G34, K22, K41
Suggested Citation: Suggested Citation
Triem, Fred W., Judicial Schizophrenia in Corporate Law: Confusing the Standard of Care With the Business Judgment Rule. Alaska Law Review, Vol. 24, p. 23, 2007. Available at SSRN: https://ssrn.com/abstract=975775