What Is the Business Judgment Rule?

The business judgment principle has been translated into business judgment rules and business judgment rules. According to the Black Law Dictionary, it refers to a rule that waives the manager's responsibility for the company's business. The premise is that the business belongs to the company's powers and managers. Within the scope of authority and with reasonable grounds to show that the business was done in good faith.

Business judgment principles

Business judgment principles are translated into business judgment rules and business judgment rules.

From an economic point of view, as a profit-making entity, in the process of maximizing profit, the company itself must bear the danger of business failure. From a legal point of view, in some cases, even if the directors fully perform their duty of care, they may still make erroneous or even wrong business judgments. Obviously, management errors in economics do not of course lead to negligence and liability in company law. In order to achieve a balance between the interests of the company and the interests of the directors, US courts have gradually summarized a "The Business Judgment Rule" in long-term judicial practice, in an attempt to manage general management errors and legal operations. A line is drawn between fault liability. That is, when the directors of a company make a commercial operation judgment and decision, if they have done their duty of care out of good faith and obtained a reasonable information basis, then even if the decision is wrong, the director can be exempted from legal responsibility. Responsibility. Therefore, the essence of commercial business judgment rules is to limit directors' liability to a reasonable range.

It has existed and developed in common law for nearly 150 years, and is an important principle in American company law and case law. The business judgment principle is closely related to the director's duty of care, and is based on the premise that the director has fulfilled his duty of care, rather than merely providing a "protective umbrella" for directors. Therefore, a serious study of the rules for judging commercial operations is of positive significance for regulating the company's directors' business behavior and improving China's director liability system.

First, when directors are authorized to engage in company transactions, as long as there is no personal interest, the court cannot prohibit or cancel the transaction on the grounds that the directors did not meet the due standards when performing their duties.

Second, as long as the director authorized to engage in the transaction does not meet one of the above three conditions, the company is not liable for compensation for the loss suffered by the company due to the transaction.

Third, the business judgment principle is both a mechanism of burden of proof and an entity

Directors advocate the protection of business judgment principles, which should meet the following requirements:

First, the conduct of directors is limited to the occasion of commercial judgment.

Second, the directors have complied with their fidelity obligations, and commercial judgments do not include conflicts between their personal interests and the interests of the company. That is, the business judgment principle only applies to the directors' violation of the duty of care, but not to the director's violation of the duty of faithfulness.

Thirdly, the information obtained by the directors on the basis of which to make business judgment principles had reason to be considered sufficient and accurate at that time.

Fourth, directors have good reasons to believe that their business judgment principles are in the best interest of the company.

Fifth, the directors did not have gross negligence in making commercial judgments.

Sixth, business judgment itself does not violate laws, regulations or the articles of association

(A) procedural law

As a procedural rule, the business judgment principle provides directors with a litigation defense system and establishes a counterbalance between the plaintiff and the defendant. Legal economics believes that the adversarial system of procedural law is efficient. The full competition between the two parties will help the court to make the best choice between the two and will increase the accuracy of the judgment. (P128-131) When analyzing the field of legal procedures, Posner argued that legal procedures should be regarded as a market for resource allocation, and a comparative analysis of legal distribution and market distribution: Legal procedures, like markets, take the concept of opportunity cost Introduce people to make choices under the guidance of motivation to maximize benefits. Like markets, legal proceedings are competitive. The Anglo-American litigation system put the court in a position similar to that of a market consumer and was forced to choose between two powerful commodities. The key stages of the legal distribution process are governed by the competition between the plaintiff and the defendant to win the case. Since we also consider the business judgment principle as an adversarial procedural rule, it should also bring the efficiency that a general adversarial system can bring.

Business judgment principle is the distribution system of burden of proof

In the 1984 judgment of the Supreme Court of Delaware, Aronson v. Lewis, stated: "The principle of business judgment is a presumption that the business judgment made by the directors of the company is On the basis of obtaining sufficient information; honestly and with valid reasons to believe that the judgment is in the company's best interests. As for the decision, as long as it is not an abuse of discretion, the court should respect the director's business judgment. In addition, provide evidence Liability is borne by the party who believes that the director's judgment is wrong, and that party is responsible for proving that he has sufficient factual evidence to reverse the presumption. " It can be seen that the principle of business judgment is a presumption. It is a burden-allocating mechanism in litigation, that is, the independent behavior of directors is assumed to be done in good faith and due care. . (P189) In the Procedural Law, the application of the presumption has an extremely close relationship with the burden of proof of the parties. (P200-204) According to the degree of presumption, as long as there is no evidence to the contrary, the court can presume that the director is convinced that his actions will be in the company's best interest; and that the director can be presumed to have made an honest judgment on the company's business . If the director does not perform his duties honestly, the other party who is held accountable must bear the burden of proof. In addition to proving that the director has violated his duty of care, the plaintiff must also prove that the director's business judgment did not meet one or more of the requirements of the business judgment principle. In practice, the plaintiffs are generally the minority shareholders of the company. It is difficult for them to obtain information and materials about the real situation and situation of the directors at the time of the decision, and it is difficult to produce strong evidence, which is enough to overturn the presumption of commercial judgment principles. It can be seen that the presumption system legally exempts the party's burden of proof from the burden of proof, which is a distribution system of burden of proof between the parties. This method of assigning the burden of proof, "it first set a procedural barrier to the challenger (ie, the shareholder) procedurally." The difficulty of winning the plaintiff was greatly increased; at the same time, the directors of the defendant were protected to a greater degree. From the perspective of procedural law, the method of allocating the burden of proof determined by the presumption form of business judgment principles is more beneficial to the directors and not to the plaintiff shareholders.

2. The principle of business judgment is a defence system

As long as the shareholders file a lawsuit, the director can raise this principle as a defense; and only when the plaintiff exercises the right of claim against the director, the director can use this right of defense, without the right of defense, there is no right of defense. The plea system is an important protection system provided by the law for defendants. Without procedural defence tools available to directors, directors can only be subject to the plaintiff's offense and are procedurally passive, which is obviously unfair to the directors who are parties to the lawsuit. Therefore, from this point of view, the rule provides a powerful weapon for directors in the procedure, and it is also conducive to the realization of equal rights of both parties in the proceedings.

3. The principle of business judgment is a strategy for the court to avoid substantive examination of business operations

From the standpoint of the court, the judge is not a businessman and does not have the necessary skills and business judgment ability for the businessman to engage in business activities. It is difficult to ask the judge to judge the correctness of the business judgment. Therefore, the court has long been unwilling to Illegal and conflict of interest judgments are conducted after the Zhuge Liang-style substantive review. Because it "is neither within the jurisdiction of the court nor beyond the competence of the judge". Therefore, the application of business judgment principles to judicial procedures is obviously advantageous for saving court resources. This has also become an important policy factor for the US courts to consider the principles of commercial judgment.

(2) Substantive law

1. The principle of business judgment is a balance mechanism of directors' power and responsibility

In contemporary society, the board of directors exercises the company's operation and management power to centrally manage the company. This is not only an inevitable rule of the company's development, but also a direct result of the decentralization of the company's equity and social division of labor and the inevitable requirement of the company's operating efficiency. However, in order to prevent the abuse of director's power, it is necessary to strengthen the director's obligations. Too much emphasis on directors 'power, or too much emphasis on directors' obligations, is not conducive to the advantages of centralized management. Therefore, it is necessary to establish a balance mechanism so that the effectiveness of both can be exerted. The business judgment principle is just such a mechanism, it promotes the balance between the company's centralized management system and the obligation of integrity to a certain extent. While providing protection for the company's directors, it also protects the company's shareholders from the director's breach of integrity. Damage.

2. The business judgment principle is a mechanism for the rational distribution of operating risks between shareholders and directors

The ultimate purpose of the board of directors in engaging in commercial activities is to maximize the interests of shareholders. However, commercial operations are inherently risky, and directors are not insurers. The professional nature of directors determines that they must face a complex and changing business environment. To seize business opportunities, they must make decisions quickly. "They are not like judges, capable and willing to argue endlessly for the right answer to a particular case; unlike scholars, they are scrupulous in their pursuit of truth; they are not like scientists, seeking for excellence in a highly specialized field A better method. "Therefore, the timeliness of commercial decision-making means that directors will inevitably make judgments with incomplete information, and judgment errors are inevitable. Common sense in economics also tells us that risk is directly proportional to return. Therefore, the pursuit of maximizing benefits implies the risk of operating failure. As shareholders as investors purchase company stocks based on their free choices, such purchase decisions are largely based on a rational judgment of the company's managers. In a sense, shareholders are willing to accept the risks caused by misjudgment. One of the mechanisms by which the principle of business judgment saves directors from being responsible for the operating decisions they make is also the rational distribution of operating risks among shareholders and directors.

3. Business judgment principles are a natural extension of the characteristics of business risks and directors' decisions

Commercial risk is divided into two types: controllable risk and uncontrollable risk. Controllable risk refers to the risk that can be controlled through certain mechanisms, such as moral hazard caused by fraud, dishonest transactions, or self-interested behavior. (P339) Controllable risks are unavoidable risks, such as the risk of decision-making matters themselves, the risk of incomplete information, and so on. Moreover, from the characteristics of directors' decisions, first of all, the information collected by directors is bound to be limited by cost factors. Therefore, in the decision-making process, assumptions, evaluations, and choices must be made on the basis of incomplete information. Secondly, the purpose of the director's decision-making is not to find out what facts and truths, but to make the best choice in his personal opinion. Therefore, directors need not guarantee that the decisions they make are absolutely correct. In fact, they are difficult to guarantee. It is unreasonable to require directors to take responsibility for the losses caused by the inevitable operating risks in their operating decisions, just as it is to require directors to ensure that all business decisions they make are absolutely correct. As Judge Lund? Hand said, "If the law requires directors to guarantee the success of their company, otherwise they will be punished for fault, then no reasonable person will accept this position." (P553) The principle of business judgment is in good faith. And it has paid reasonable attention to the directors and the commercial decisions made by the directors to provide protection, which is the inevitable requirement of the characteristics of business risks and business decisions.

(1) The fact that the business judgment was implemented (A Business Decision)

The American scholar Solomon believes that the principle of business judgment only protects commercial decisions, and "a matter of business judgment" is a prerequisite for the application of the principle of business judgment. The existence of a business judgment matter is a watershed that distinguishes applicable law (P668). In other words, when there is a business judgment matter, the "law" to be applied first is the business judgment principle, and according to the conditions and standards of the business judgment principle, whether the director should be protected by the principle; when there is no business judgment matter The applicable law is the case law and the statutory law on the directors 'duty of care, and the directors' compliance with their duties is measured according to the standards and conditions stipulated by these laws.

(2) The directors have no interest in this business judgment (Disinterestedness)

In the United States, directors' obligations to the company are divided into obligations of care and fidelity. In accordance with the requirement of loyalty, directors must not override their personal interests over the interests of the company. Therefore, if the director who makes a certain business judgment has some personal interest between him and the decision, it is difficult to expect him to make a decision that is entirely in the best interest of the company without any selfishness. When a director engages in an act such as a transaction with a company, the application of the principle of exclusion of business judgment should be unquestionable, but if the director makes the judgment at the same time simply because there is a certain personal interest in the decision, For this reason, the complete exclusion of the application of the principles of business judgment is obviously contrary to the principle of fairness. If the principle of exclusion of business judgments is applied, the personal benefits obtained by the directors in the decision shall be the same as those obtained by the company's exchange, or the directors shall obtain tangible assets not obtained by the company and all shareholders from the transaction. As long as one of the above two situations exists, it cannot meet the requirements that the directors and the business judgment have no interest.

(3) Due Care

The core issue of "reasonable attention", which is one of the prerequisites for the principles of business judgment, lies in the preparations made by directors or senior management when making business decisions, not the business decisions themselves. (P670) What exactly do policymakers need to do in the decision-making process to prove that they have done their "reasonable attention" in line with the objective situation at the time? In the long history of case law development, judges in the United States have mastered a set of criteria for measuring whether directors or senior managers' decision-making behavior has reached a "reasonable attention" level. In general, this set of standards is divided into general requirements and procedural requirements.

General requirements

The general requirement is that directors have "the kind of attention that ordinary prudent people, in similar positions, and in similar environments, can do." This standard requires directors to have mastered similar situations before making decisions. Important information that an ordinary cautious person thinks should be held.

2. Procedure requirements

Procedural requirements mean that directors should conduct a certain degree of investigation and consultation before making decisions. This is a logical extension of general requirements. When the court judges whether the directors have made reasonable attention in making a decision, it mainly examines the investigation work done by the director before making the decision. When evaluating the adequacy of the investigation, the court often has to make a decision based on the nature of the decision Time to consider.

(4) Directors who make business judgments must be in good faith

When the director meets the above conditions, as long as he "reasonably believes that the business decision he made is in the best interest of the company", the director is of course protected by the principle of business judgment. And "reasonably believe that the business decision he made is in the best interest of the company" is the content of "goodwill" required by the principle of business judgment.

Enlightenment of Business Judgment Principles to China

The formation of the business judgment principle is closely related to the history of the development of the unique company law in the United States and the traditional business law culture. It is not only a mechanism for protecting the interests of directors but also an internal driving force for the survival and development of the company. It is also an obligation of directors, and it is also a frame of reference for directors' attention and fidelity. The business judgment principle itself is a prerequisite for litigation. Only after the court determines whether the business judgment principle can be used can the shareholder's lawsuit against the director really start to proceed. Therefore, the establishment of business judgment principles requires the cooperation of other relevant systems. On the other hand, the establishment of other systems in company law cannot achieve its original purpose if it is deviated from the application of business judgment principles. Therefore, in addition to the establishment of commercial judgment principles in our country, other substantive law systems (such as the independence of directors 'management and directors' trust obligations) must also be established accordingly, so as to ensure that commercial judgment principles play a huge role.

In procedural law, through the above analysis, we know that the principle of commercial judgment is a system of defense right, which is a lawsuit defense right that the law grants directors to the plaintiff (usually a minority shareholder). As we all know, the United States has a well-developed adversarial system in civil lawsuits, and in addition to regulating the presentation and acceptance of evidence, the effective operation of the adversarial system is inseparable from specific rules for effective operation. The existence of these procedures not only makes the litigation procedure more in line with the rationality of modern people, but also limits the will of the judge, and it is easy to ensure the neutrality and efficiency of the referee, and it reflects the superiority of the litigation system from the general dispute resolution mechanism. The author believes that the defense system is one of the important rules that constitutes the adversarial system. China's civil law and civil procedure law also have a similar defense right system. Typical examples include the performance of the right of defense and the right of uneasy defense in the performance of dual service contracts. Although these rights guarantee the performance of the contract, they also obviously play a role in balancing the rights of both parties in the procedural law. This type of defense system is mainly concentrated in the field of contract law, and no similar system has been introduced in the field of company law. In the field of criminal and civil procedure law, our country is currently working hard to advance the model of the British and American confrontation court debate. In line with this trend, we may wish to introduce the principle of commercial judgment and try to draw on the adversarial system in the US litigation law from various aspects, and boldly introduce a similar system of defence into China's company law. This may help to some extent the realization of passive justice for judges in corporate law proceedings.

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