Business Judgment Rule Research Articles

State Regulation on Business Entities Owned by State Universities: Losses and Liability

The Act of Higher Education stated that Higher Education Management Autonomy is carried out by the basis and objectives and abilities of tertiary institutions. This causes not all State Universities to have the same status, one of which is Legal Entity State University. Legal Entity State University is a state university established by the government which is an autonomous public legal entity. Implementing regulations related to Legal Entity State University is Government Regulation Number 26 in 2015 on the Form and Mechanism of Legal Entity State University Funding. The Government Regulation indicates that Legal Entity State University can have a business entity. The problem is, if the Legal Entity State University carries out a business activity, there will be a possibility that the business will suffer losses. If there is a loss, how is the liability for the loss of the Legal Entity State University? Based on the business judgment rule doctrine, not every business loss is classified as a state loss. If the financial loss is not caused by intentional acts against the law or abuse of authority, then that matter is not classified as a state loss. If the losses included state losses, then the liability losses caused by the activities of those business entities owned by state universities are carried out in three ways, there are criminal liability, civil liability, and accountability in the state administrative law.

Implementation of the Doctrine of the Business Judgment Rule on Bankruptcy Law in Indonesia

One of the mechanisms that can be taken in resolving accounts payable to a limited liability company in bankruptcy. In the case of bankruptcy due to mistakes made personally by the Board of Directors and the Board of Commissioners, they must be responsible for debts held by limited liability companies. The company law regulates the way for the Board of Directors and Board of Commissioners to avoid liability for losses suffered by the company, through the doctrine of the Business Judgment Rule (BJR). In practice, the application of the BJR doctrine in bankruptcy law is characterized by differences in interpretation between law enforcers. Differences in interpretation occur because there is no clear provision in the Republic of Indonesia Law Number 37 of 2004 concerning Bankruptcy and Delay of Obligations to Pay Debt (Law No. 37/2004) which limits the filing of bankruptcy applications to the personal Directors and Board of Commissioners. The research in this article is carried out by reform-oriented research methods, to make changes to Law No. 37/2004 to clarify the application of the BJR doctrine in bankruptcy law in Indonesia. With the implementation of legal reform, it is expected that there will be no difference in interpretation regarding the application of the BJR doctrine to bankruptcy law at the Commercial Court in Indonesia.

Is There Any Basis for Categorizing the Business Judgment Rule as a Presumption?

This article analyzes whether there are grounds for the case law to categorize the business judgment rule as a presumption. The author presents the main criterions that cause the categorization of the legal norm as a presumption. In the context of the identified criterions of the presumption category, it is evaluated whether the business judgment rule matches such criterions.

The Independent Board as Shield

The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’etre lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead. Numerous defects in the design and practice of the independent board inhibit its ability to curb managerial excess. Nowhere is this more evident than in the context of transactions that enrich the CEO. When executive compensation and similar matters are approved by independent directors, they take on a new quality: they become insulated by the business judgment rule. This rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain—in determining the price of a product, for example—and it immunizes such decisions from court challenge. But independent directors can opt to extend the rule’s protection beyond this narrow class of duty of care cases to domains that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest that defeats the major objective of the independent board and important goals of corporate law more generally. This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment protection for claims implicating the duty of loyalty. Judges would apply the familiar entire fairness standard instead. The clearest rationale for this reform comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to adjudicate conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of the independent board is overstated and may have inadvertently fostered a sense of complacency around board power.

Complexity and Class: A Review of Kent Greenfield’s Corporations Are People Too (And They Should Act Like It)

Kent Greenfield has graced us with a new book that is novel, nuanced, and accessible. Dispensing with rhetoric at odds with both the nature of the corporation and his view of its normative role, Greenfield makes a two-pronged argument: corporations should have speech rights, albeit of a more limited form than individuals, and the relevant issues are first and foremost issues of corporate governance. Regarding corporate governance, Greenfield would have us dispense with the business judgment rule and extend fiduciary duties to non-shareholder stakeholders. Greenfield’s recommendations in the areas of both speech law and corporate governance have some attraction but do not take into account the cost that comes with additional complexity. In particular, forcing fiduciary obligation into a stakeholder framework goes against the very nature of fiduciary obligation. Greenfield also misses an opportunity to reassess the role of the corporation in society increasingly divided by professional and educational class: corporations are uniquely situated to serve as mediating institutions at the center of debates that will rage in the coming years.

FIDUCIARY GAME RULES AND THE GOVERNANCE NATURE IN THE COMPANY

The author considers features of relationships between the fiduciary (management, board of director) and shareholders (beneficiaries). The nature of fiduciary relations is connected with «a critical resource» (assets) of the beneficiary. In the company economic interests of various participants (shareholders, management) face. Delegation discretion the shareholder to the management will allow to build together with the shareholder effective economic strategy of the company, under condition of execution of fiduciary duties. The management possesses administrative immunity within the limits of application of the business judgment rule. Actions of the management at transaction fulfilment should have real character, possess economic sense, a rationality and to promote achievement of economic benefit in the form of increase to shareholder value. The special attention is given to the fiduciary nature of interaction. Imposing of fiduciary duties on the management allows the beneficiary to protect the company from destruction of shareholder value. The shareholder should specify such game rules that the management was unable break them or, at least, cost of their infringement would be above reception of personal benefit. Fiduciary principles allow to soften the conflict between management and the shareholder. Besides, the fiduciary mechanism possesses a preventive element, keeping the company from destruction. The given obligation of loyalty protects resources of the shareholder from wrongful acts from the management. Fiduciary principles allow to balance economic interests between a management and shareholders.

Применение правила бизнес-решения в российских реалиях

Применение правила бизнес-решения в российских реалиях

Criteria of Bad Debt at National Banks That Have an Implication for Corruption

Banking is closely related to risk management as seen in Bank Indonesia Regulation number 11/25/2009 concerning Amendments to Bank Indonesia Regulation (PBI) Number: 5/8/2003 concerning Application of Risk Management for Commercial Banks. In Article 1 number 4 PBI 11/25/2009, explained risk is the potential loss due to the occurrence of certain events. The types of risks that might occur, are described in Article 4 PBI: 11/25/2009 namely Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Legal Risk, Reputation Risk, Strategic Risk and Compliance Risk, but law enforcement officials cannot distinguish whether a state loss is the result of a Business Judgment Rule (BJR) or indeed an illegal act, focus on a state financial loss.

The Economics and Antitrust of Bundling

This article explains the economics and antitrust of bundling. I first show that popular arguments such as demand complementarities, economies of scope, and price discrimination are not sufficient. I then detail potentially anticompetitive factors such as leverage and opacity. I then use simple examples to show how variation in consumer valuations explains bundling and is not anticompetitive. Finally, I explore other business judgment rule explanations for bundling.

Corporate Control and the Limits of Judicial Review

Companies with a dual-class structure have increasingly been involved in high-profile battles over the reallocation of control rights. Google, for instance, sought to entrench its founders’ control over the corporation by recapitalizing from a dual-class into a triple-class structure. The CBS board, in contrast, attempted to dilute its controlling shareholder by distributing a voting-stock-dividend that would empower minority shareholders to block a merger it perceived to be harmful. These cases raise a fundamental question at the heart of corporate law: What is the proper judicial response to self-dealing claims regarding reallocations of corporate control rights? This Article shows that the reallocation of control rights raises an inevitable tradeoff between investors’ protection from agency costs and the controller’s ability to pursue its idiosyncratic vision, making the value of different allocations of control rights both firm-specific and individual-specific. It is thus inherently impossible to create objective valuation models for reallocation of control rights. The impossibility of creating reliable valuation models sets the limits of judicial review: The legal tools long used by Delaware courts to adjudicate conflicts over cash-flow rights, such as entire fairness review, are fundamentally incompatible with the adjudication of conflicts over reallocations of control rights. This Article explores the policy implications of this insight and suggests that courts treat reallocations of control rights as questions of charter interpretation as to who has the power to decide on reallocations of control rights, and avoid reviewing the discretion to use that power. Courts should enforce the decision of the parties as to reallocations of control rights and apply the business judgement rule where the charter is silent.

IMPLEMENTASI DOKTRIN BUSINESS JUDGEMENT RULE DI INDONESIA

The Board of Directors is one of the most important organs in a Limited Liability Company. Management of the Company that carried out by the board of directors includes running business activities, controlling, and making business decisions that have an impact on a Limited Liability Company whether the decision will cause loss or profit. In making business decisions, the Board of Directors must do so in the manner of good faith, carefully, and in accordance with the aims and objectives of the Company's establishment. If the directors already made the decision the correct manner, they cannot be held personally accountable for the decisions they make. That is what a Business judgment rules is, a doctrine that provides protection to directors to not be personally responsible if the business decisions taken cause losses to the company. Relying on a literature study, the business judgment rule is implicitly regulated in article 92 paragraph 1 and 97 paragraph 5 of Law no. 40 of 2007 regarding the Limited Liability Companies, several cases related to the business judgment rule, this article intends to analyze the implementation of the doctrine of the business judgment rule in Indonesia

Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit. Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm. This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought. Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

Reasons of Application of the Business Judgment Rule

[full article and abstract in Lithuanian; abstract in English]
 The reasons which led to the formation of the business judgment rule and its implementation are discussed in the present article. The courts usually have the competence to rule on the legality of the defendant’s actions and (or) their civil liability. Courts’ competence is being limited when the legality of the business decisions is analyzed and (or) the case of civil liability of the board members‘ or chief executive officer‘s of the private legal entities is decided. Due to the application of the business judgment rule the courts should abstain from evaluating the legality of the business judgments of the private legal entities, if they turned to be unprofitable or profitable not enough where such decisions were made by complying with the duties applied to the board members or chief executive officers. Motives, which justifies special civil liability regime of the directors are analyzed in the article.
 Summary
 Although the courts usually have the competence to rule on the legality of the defendant’s actions and (or) their civil liability, Courts’ competence is being limited when the legality of the business decisions is analyzed and (or) the case of civil liability of the board members‘ or chief executive officer‘s of the private legal entities is decided due to the appli- cation of the business judgment rule. As the business judgment rule has been identified by the case law of the Supreme Court of Lithuania, in this article author analyzes the reasons which led to the formation of the business judgment rule and its implementation in the jurisdiction of its origin – United States of America. Conclussions demonstrate that business judgment rule was implemented in the US case law with the purpose to guarantee and declare clearly that the ultimate decision maker within the private legal entity are board members or chief executive officers and not the courts. Business judgment rule works as a guarantee for the executives that they will not be held liable or criticized for the well-informed and fair decisions they make in the course of the company’s management. It encourages board members and chief exec- utive officers to take the risk needed for the development of company.

SNAP Judgment: Unequal Voting and the Business Judgment Rule

Increasingly, company founders have been opting to shore up control with voting structures that undercut shareholder voting power, where only a decade ago almost all chose the standard and accepted one-share, one-vote structure. Now, with Snap's new no-vote structure, a controller can reduce her stake to only a penny and still hold onto control. These low- and no-vote stock ownership structures drastically undercut shareholder influence, undermine corporate governance, and will shift the burden of investment grievances to the courts. In reviewing board action, courts have historically taken comfort in the fact that, even at controlled companies, markets and corporate democracy will usually do a good enough job constraining management. Dual-class controlled companies, however, are fundamentally different. Unlike at a single-class controlled company, for a dual-class controlled company, there may be neither market incentives nor board oversight. Without board direction and market forces protecting shareholder interests, there is little justification for judicial restraint under the business judgment rule, so the burden of monitoring investments will end up in the courts. The judiciary must determine whether to add heightened review of operational decisions at dual-class controlled companies to the already heightened review of interested transactions. The alternative is promoting a new class of unaccountable and unmotivated corporations.

Standard of Conduct or Standard of Review? Examination of an African Business Judgment Rule under South Africa's Companies Act 71 of 2008

AbstractThis article highlights that section 76(4)(a) of South Africa's Companies Act, which reflects the business judgment rule (BJR) concept, is a standard of review, providing a means of determining whether a director has met his or her undertakings under section 76(3). The article suggests that section 76 should be titled “Standards of conduct and review” instead of referring only to standards of conduct. It draws a clear distinction between standards of conduct (including the personal financial interests disclosure requirements) on one hand, and a standard of review on the other. After tracing the traditional international requirements of BJR, the article analyses the decision-making requirements under section 76(4)(a). It concludes that, while section 76(4)(a) compares favourably with US and Australian laws, the omission of a good faith requirement is unfortunate since that is a critical component of decision-making. The article proposes that good faith and proper purpose under section 76(3)(a) should form part of the section 76(4)(a) requirements.

Wells Fargo and company: shareholder derivative action - should the case succeed in federal court for the board of directors

A shareholder derivative suit is an action allowed by the courts available for shareholders who believe that they have been harmed by actions of the board of directors and management. In most instances, particularly in the US state of Delaware, the actions are not allowed to proceed. The rationale being that the business judgment rule applies and as a consequence boards of directors are not held responsible for bad decisions and as a result, the business judgment is held to be supreme. Thus they are presumed to act with diligence, without self-interest and in the best interests of the corporation. In the case of the action against Wells Fargo and Company, Judge Tigar of the Northern District of California, has allowed the action to go ahead, on the basis that the directors had been negligent on multiple actions with respect to several proceedings by Federal Agencies against the bank and furthermore that the directors failed to hold senior management to account when concerns were raised from several sources about malfeasance occurring in the bank. The paper suggests the arguments both for the plaintiffs and the defendants in the case.

The concept of business judgment

AbstractCategorising something as a business judgment can provide directors with a powerful shield from accountability. It has been said that the courts in England and Wales defer to directors’ business judgments and directors’ decisions are protected from review in other jurisdictions by a business judgment rule. Yet what a business judgment is has never been addressed, and so precisely what is being protected, and why, is unclear. This paper analyses case law in England and Wales and key Australian and US cases to answer this question. It argues that the courts use the term judgment in two senses: an ability, and a decision sense, and that business judgment in both senses can be linked to Knight's concept of entrepreneurial judgment, and directors’ wealth creation function. Conversely, decisions that are linked to directors’ corporate governance function and are less easy to categorise as entrepreneurial are less likely to be viewed as business judgments.

Business Judgment Rule and Director’s Occupational Breach of Trust

Business Judgment Rule and Director’s Occupational Breach of Trust

The Implementation of Receivables Write-Off of the State-Owned Banks in Indonesia

This research reviews two issues: Firstly, it describes the imple-mentation of the receivable write-off of State-Owned Bank (BUMN Banks) in Indonesia, and secondly, it describes the relevance of the independence principles of directors and Good Corporate Governance to the implementation of receivables write-off of state-owned banks in Indonesia. This research uses normative and empirical juridical approaches. The normative approach includes research on the independence principles of directors and Good Corporate Governance to the implementation of receivables write-off of the state-owned bank, while empirical research is conducted to determine the process of claim abolishment by state-owned banks in Indonesia. The outcomes of the research indicate that the unresolved legal problem related to the state financial position in the state-owned banks due to conflict of public and private law norms causes the directors of state-owned banks have not dared to do the process of claim abolishment. Therefore, consi-dering that the principle of autonomy of directors and good corporate governance is enforced properly, no one is concerned about the risk of corporate policies related to the process of claim abolishment from a state-owned bank because, in its very essence, it is a Business Judgment Rule in the banking business practice.

Governance by Business Decision: Dividends and Shareholder Voting

For dual-class companies, stock dividends have become a potent weapon for corporate boards to reallocate control without shareholder intervention. For example, the CBS board proposed to distribute voting stock to all shareholders to drastically dilute the controlling shareholder’s voting power. By contrast, the Google board issued new non-voting stock to all shareholders to perpetuate the controlling shareholders’ lock on control. In both cases, the pro rata distribution of the identical stock seemingly treats all shareholders equally, but it has a starkly unequal impact on each class’s voting power. Are such governance changes by stock dividends within board discretion? The level of board discretion in making stock dividends is primarily governed by each company’s corporate charter, and this Article presents the original, hand-collected data of charter provisions on stock dividends from 222 dual-class companies. The analysis of the charter provisions shows diverse approaches to stock dividends across companies. Largely due to such heterogeneity, interpretation and limitation of charter provisions are often uncertain. At the same time, courts have long treated dividends as boards’ business judgment and declined to second-guess their substantive merits as long as dividends are pro rata. Given the potential impact on corporate governance, however, the need for a distinctive treatment of stock dividends is long overdue. The Article also offers normative suggestions to fill the legal vacuum over stock dividends. First, as an ex ante mechanism, state corporate statutes can provide a set of default provisions on stock dividends to guide companies. Second, as an ex post remedy, the business judgment rule protection should be limited to the narrowly defined pro rata stock distribution (i.e., proportional distribution within the same class of stock). Non-pro rata stock dividends without the approval by adversely affected class should be subject to heightened judicial scrutiny. This is because such stock dividends are not driven primarily by business purpose, are not pro-rata, and sometimes raise concern over the directors’ promotion of self-interest.