Your Business Deserves To Thrive

New York Law Update: Business Judgment Rule

On Behalf of | Mar 8, 2016 | Business Management, New York Law Update, Uncategorized

In our previous blog series on Texas Double-Derivative Shareholder Suit, we touched briefly on the concept of business judgment rule when we discussed a board of directors’ decision to pursue or forgo corporate causes of action in the context of closely held corporations in Sneed v. Webre.[1]  While the case we discussed was decided under Texas law, the principles underlying business judgment rule are similar in other jurisdictions: the rule generally presumes that directors or managers, in performing their functions, were honest and well-meaning and that their decisions were informed and rationally undertaken, thereby protecting board decisions from judicial review.  The justification for this presumption is to encourage businesses to take risks and to encourage directors and managers to serve on the board without the fear of being sued when their otherwise well-meaning business decisions turn out to be wrong.

In Tsui v. Chou, an appellate court in New York recently had occasion to clarify when board decisions are not protected under the business judgment rule.  In that case, plaintiffs sued the board of managers of a condominium derivatively on behalf of all unit owners, alleging that the defendants breached their fiduciary duties by, among other things, failing to disclose various lawsuits and one of the defendants’ criminal record, failing to account for missing monies and receipts, commingling funds, denying access to information and documentation, and improperly renewing the management agreement.[2]  The lower court determined that plaintiffs’ breach of fiduciary duty and breach of contract claims were barred by the business judgment rule.[3]  The appeals court found, however, that there was “nothing in the record to indicate that the board discussed or informed themselves as to these allegations” and, thus, the “board’s determination not to pursue these claims was arbitrary and not protected under the business judgment rule.”[4]  Moreover, the court said, even if the board did consider the allegations of improper extension of their terms, any determination on that issue would not be protected under the business judgment rule, as the voting members were clearly self-interested.[5]  The court found, however, that the lower court correctly determined that the board’s decision not to pursue other claims, including trespass and constructive trust causes of action, was entitled to deference under the business judgment rule, because there was evidence that the board considered the allegations underlying the claims and that the voting members did not have an interest in the claims.[6]

If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally Sneed v. Webre, No. 12-0045 (Tex. Sup. Ct. May 29, 2015).

[2] Tsui v. Chou, 2016 N.Y. Slip Op. 00428 (1st Dep’t, Jan. 21, 2016), at 2.

[3] Id.

[4] Id.

[5] Id.

[6] Id. at 2–3.