Via The Defining Tension comes this video in which an animated puppy explains the duties of the audit committee of a nonprofit.
I must quibble with one aspect of the discussion; namely, the characterization of the business judgment rule as a standard of conduct.
As TDT's BFA notes, the business judgment rule is properly understood as a standard of review (specifically, an abstention doctrine) rather than as a standard of conduct.
Remarkably, the commentator (the dog if you will), qualifies the business judgment rule as a standard of conduct for directors to follow, apparently referring to California corporate law.That doesn't seem to be in line with the general approach that the business judgment rule is primarily a standard of review by the court, a tool of judicial review, not to be conflated with the fiduciary duties of care and loyalty resting on directors. See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2002) and Moran v. Household International, Inc., 490 A.2d 1059 (Del. Ch. 1985). Although there is a connection between these duties and the rule, they're not the same and should not be treated as such. For the gist of the rule, properly understood a policy of judicial non-review, see here.
Some scholars have sought to reconcile the duty of care and the business judgment rule by distinguishing between standards of conduct and standards of review. According to this conception, the duty of care is a standard of conduct, which specifies how directors should conduct themselves. In contrast, the business judgment rule is a standard of review, which sets forth the test courts will use in determining whether the directors’ conduct gives rise to liability. Unlike typical negligence tort cases, in which the standard of review and the standard of conduct are identical, in corporate law they purportedly diverge. The function of the business judgment rule thus is to create a less demanding standard of review than the (largely aspirational) standard of conduct created by the duty of care. But what is the standard? It may be mere subjective good faith, it may be a requirement of rationality, it may be gross negligence. No one seems to know for sure. The key point for our purposes, however, is the basic claim that, as a substantive standard of review, the business judgment rule entails “some objective review of the quality of the [board’s] decision, however limited.” Accordingly, as articulated by most of its proponents, this dual standards interpretation is inconsistent with our argument that the business judgment rule should be deemed an abstention doctrine.
The MBCA recently adopted a different version of the dual standards approach, which ends up much closer to our abstention interpretation. New MBCA § 8.30 sets forth the standards of conduct for directors. Analogously to those Delaware decisions describing the duty of care as process oriented, § 8.30 focuses on the manner in which the board carried out its duties, not the correctness or reasonableness of its decisions. Under § 8.30(a) the director must act in good faith and in a manner the director reasonably believes to be in the corporation’s best interest. Note the absence of any reference to due or reasonable care. Those references appear only in § 8.30(b), which relates solely to the directors’ duty to make informed decisions. When “becoming informed” the board is to exercise “the care that a person in a like position would reasonably believe appropriate under similar circumstances.” There is a striking contrast with the Van Gorkom obligation to gather all materially information reasonably available to the board. Under the MBCA, directors can act on less than all available information, provided doing so satisfies the reasonable person standard.
Conduct that satisfies the requirements of § 8.30 cannot result in liability. Conduct falling short of those aspirational goals can only result in liability if it violates the standards of director liability set forth in MBCA § 8.31. Specifically, under § 8.31(a)(2), liability can be imposed where the director acted in bad faith, did not reasonably believe the action to be in the corporation’s best interest, was not informed to the extent the director reasonably believed appropriate under the circumstances, was interested in the transaction, was not independent, engaged in self-dealing, or failed to exercise oversight over a sustained period.
Although the drafters deny any intent to codify the business judgment rule, MBCA § 8.31(a)(2) effectively codifies a fairly aggressive version of the abstention approach to judicial review advocated by our interpretation of the business judgment rule. Unlike Van Gorkom, for example, under which a court asks whether the director gathered all material information reasonably available, a court under § 8.31 asks only whether the director was informed to the extent the director reasonably believed appropriate under the circumstances, a much more deferential standard. Unlike Caremark, director misfeasance with respect to oversight results in liability only where there has been a “sustained failure” or the director failed to timely take action after being put on notice of potential problems. The MBCA thus comes close to codifying Graham’s position on oversight duties.
I explain all this in more detail in my treatise Corporation Law (Concept and Insight Series)
