Business Judgment Research Articles

Relevance of Good Corporate Governance Towards the Principle of Business Judgement Rule for State-owned Enterprises’ Corruption Cases: A Legal Perspective

Business judgement rule is often used as one of the principles to determine whether a corporate actor is evidently guilty in various corruption cases. Thus, this study aims to explain the relevance of corporate governance implementation as an additional objective measurement towards the business judgement rule principle in state-owned enterprises corruption cases. Through the juridical-normative approach and qualitative method analysis, it is found that in the middle of ambiguous positions of state-owned corporations in Indonesia, corporate governance must be taken into account in determining the court ruling especially in many corruption cases as a tool to minimize the legal uncertainty. This study also found that the corporate governance standard is able to convince the public in various financial decisions as a parallel example.

The Application of Business Judgment Rule Principles: The Protection for State-Owned Enterprises Directors to Business Risk Failure

State-owned enterprises have a strategic position in realizing the mandate of the 4th paragraph of the Preamble of the 1945 Constitution. However, the absence of synchronization of laws and regulations in interpreting the State-Owned Enterprises fund as separated state assets, creates legal uncertainty for the Board of Directors when losses arise due to business risks. This condition raises the issue of the board of directors' responsibilities in managing State-Owned Enterprise's finances. Thus, there is the need to apply the Principles of Business Judgment Rule in protecting the Directors from State-Owned Enterprises losses. The approach employed in this study was juridical normative research. Specifically, this study used descriptive analysis. The data were analyzed qualitatively. The findings revealed: (1) State-owned enterprises have played a role in realizing Indonesian Economic Democracy with their distinctive business characteristics, a profit-seeking company and social services provider to the community; (2) State-owned enterprise's losses are not related to state finances. This is because state equity participation has been transformed into state shares/funds to State-owned Enterprises whose management is based on the provisions of Limited Liability Companies; and (3) The principle of the Business Judgment Rule provides protection for the Board of Directors. It states that they can not be held accountable for the losses in state-owned Enterprises if the management of State Owned Enterprises is based on the following principles: (a) due of care; (b) due of skill; (c) good faith, and (d) for the best interest of the company. In conclusion, BUMN Persero that experiences losses due to business risks cannot be categorized as state financial losses. In addition, according to the principles of business judgment rule, Directors cannot be held accountable

Urgensi Penerapan Doktrin Business Judgment Rule terhadap Direksi BUMN dalam Perkara Tindak Pidana Korupsi

The objective of this study was to hold directors accountable for company losses, the existence of business judgment rule in positive law, and the application of Business Judgment Rule as Legal Protection of the Board of Directors in Corruption Cases. The data obtained was presented analytically descriptively where the facts were described and later analyzed based on the laws and rules applicable in Indonesia as well as the theories. The accountability of the directors of State-Owned Enterprises for the company’s losses could be classified as acts that harm the state’s finances that include administrative, civil, and criminal responsibilities. The existence of business judgment rule doctrine in positive law had been regulated in Article 97 paragraph (5) of Law Number 40 of 2007 concerning Limited Liability Companies but had not been regulated technically related to the procedures for its application. The application of the business judgment rule doctrine as the protection of directors of State-Owned Enterprises in corruption cases should be used as material for consideration related to the removal of the defendant’s fault.

Analysis of International Competitiveness of Multinational Corporations Based on Rough Sets

Modern business judgment is mostly faced with complex, unclear nature, and not fully confirmed research objects and needs a lot of relevant data investigation, inherent contradiction retrieval, and the discovery and extraction of potential laws. Formulation of rules and evaluation of system uncertainty: Appropriate decisions can be made based on this. Rough set theory is a new mathematical tool to deal with uncertain knowledge. Therefore, the theory of rough set is helpful for decision-makers to solve the decision problems of complex systems. The simplification of knowledge of information systems and incomplete information systems and the theoretical and methodological study of rule acquisition are the central issues of rough set theory and applied research. A variety of simplified theories and methods have been proposed from a variety of viewpoints. However, there are still many theoretical problems that need to be investigated and solved in these aspects. In addition, the investment environment is a complex organic system that includes economic environment, social environment, resource environment, infrastructure, and other factors. There are a variety of data to measure these factors, which are mutually restrictive and interdependent. At present, domestic and foreign scholars have basically formed a series of assessment methods and models of investment environment assessment, but most of these assessment methods are affected by the differences in the degree of subjective factors of evaluators and the establishment of index weights in the assessment process. In most cases, more reliance is placed on subjective, artificial assignments and scoring loops. Therefore, it is an appropriate and reasonable method to evaluate the investment environment through data to evaluate all the factors affecting the investment environment and reach a comprehensive evaluation conclusion, which can effectively avoid human subjective factors to a certain extent.

경영판단원칙 입법화를 위한 법정책 소고

경영판단원칙 입법화를 위한 법정책 소고

The legal protection weakness of the directors board from the risk of losses due to business decisions

Business is a risk. There is no guarantee the business is run By the board of Directors who will always bring profit. One day profit, no profit, and another time can lose. When business decisions are taken by the board of Directors losses especially in significant amounts can be ascertained will happen nervousness on the board of Directors of the Company. State-Owned Enterprises established for business purposes in the full operation of risk. Law No. 19 of 2003 concerning State-Owned Enterprises does not regulate the protection of the Board of Directors of the Company, meanwhile, Law No. 40 of 2007 on Limited Liability Companies regulation of the protection of the Board of Directors of its implementation gives rise to multi-interpretation. Business decisions made by the Board of Directors of the Company in accordance with the principles of Business Judgement Rule are business risk, should get legal protection. The purpose of this research is to find out the weaknesses of this legal protection. This research includes normative legal research with a statutory approach with The analysis technique in this research is investigation strategy. The results show that there is no legal certainty regarding business decisions taken by Directors who experience losses in business transactions so that the Government / DPR must amend the BUMN Law by adding articles on the legal protection of the Directors of Persero.

Can Mandating Corporate Social Responsibility Backfire?

Corporations have enormous influence on society. Progressive policymakers and scholars increasingly advocate for corporations to be required to consider those influences on society—a corporate social responsibility (CSR) mandate. The now‐predominant view is that merely allowing directors to consider society (a permissive regime) is ineffective.This article suggests that a CSR mandate could backfire by reducing the reputational rewards to pro‐social corporate acts. If stakeholders (customers, employees, investors) believe that corporations are legally required to do good, they might reward corporate good behavior less (“they had to do it anyway”). In contrast, if firms are merely allowed to act pro‐socially, stakeholders might provide greater rewards (“they chose to do it”). These reputational rewards matter because the business judgment rule precludes formal enforcement of a CSR mandate. Reputational and moral considerations alone must motivate pro‐social corporate acts.Using two preregistered laboratory studies with more than 500 participants, the article finds empirical support for the backfiring hypothesis: rewards for pro‐social action were greater under a permissive regime than under a mandatory one. In a third incentive‐compatible and preregistered experiment with more than 400 participants, the article further finds that the moral force of the mandate does not compensate for these reduced reputational rewards. Once participants know the mandate is unenforceable, they do not act more pro‐socially under the mandate than under the permissive regime.These results suggest a previously unrecognized benefit to the permissive regime. But the studies also suggest an unrecognized benefit to the mandate: reputational penalties for misbehavior can be greater under the mandate than under the permissive regime. Further study is necessary to determine which regime better motivates pro‐social corporate behavior. In weighing the options, this article illustrates the importance of considering reputational benefits and costs and explores how proposed statutory regimes can influence both. Changes in societal expectations and norms will determine our path forward and legal reform is but one avenue for such change.

A critical analysis of Zimbabwe's codified business judgment rule and its place in the corporate governance landscape

The business judgment rule (BJR or the Rule) is an American legal export which has become a key corporate governance tool in most leading common law jurisdictions, such as, Australia, Canada and South Africa. However, the Rule has not been formally embraced in the United Kingdom. In Zimbabwe, the Rule has traditionally been treated as a common law feature. However, section 54 of Zimbabwe's new Companies and Other Business Entities Act represents one of the significant advances in strengthening the jurisdiction's corporate governance principles by codifying the Rule. The BJR originated together with the directors' duty of care and skill. There are two main formulations of the BJR. The first one is by the Delaware Chancery Court and the second one derives from the American Law Institute's Principles of Corporate Governance. The Rule mostly applies in determining the procedural aspects of the directors' decision or the decision-making process and only in exceptional cases is it invoked to review the merits of their decision. This article seeks to critically analyse the major elements of Zimbabwe's codified BJR and to ascertain its place in the corporate governance framework. As will become clear, it will also be argued that the statutory BJR is intended for the enhancement of directorial accountability.

Long-Term Bias and Director Primacy


 
 
 In an important recent contribution to the short-termism debate, Professors Michal Barzuza and Eric Talley challenge what they call an “emerging consensus in certain legal, business, and scholarly communities . . . that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects.” See Michal Barzuza & Eric Talley, Long-Term Bias, 2020 COLUM. BUS. L. REV. 104. Instead, Barzuza and Talley contend that “corporate managers often fall prey to long-term bias—excessive optimism about their own long-term projects.”
 This article is an invited comment on Barzuza and Talley’s article. Subject to various quibbles raised herein, I broadly concur with Barzuza and Talley’s argument that corporate directors and officers can be biased towards long-term projects and, accordingly, may reject short-term projects offering higher returns.
 But what law reforms follow logically from their conclusion, if any? With respect to judicial review, I want to differ with Barzuza and Talley on three points. First, I believe Barzuza and Talley overstate the risk of judicial intervention. Second, they fail adequately to distinguish between directors and managers, even though that distinction is central to the application of Delaware law. Third, I believe their analysis implies that judges should retain the deference to director decisionmaking inherent in doctrines such as the business judgment rule and intermediate review.
 
 
 
 With respect to encouraging shareholder activism, I argue that the responsibility for policing managerial hyperopia (or myopia, for that matter) should be assigned to the board of directors, not the shareholders. Heterogenous shareholders lack the proper incentives and knowledge to properly police management.
 
 
 
 
 

Benefit Corporations: Role of Directors and Their Liability in Italy and in the United States of America

The benefit corporation has given rise to a wide debate regarding both the systematic impact of this corporate form and, more specifically, the possible protection that is to be granted to stakeholders. This article intends to clarify the extent to which control by courts over directors can be reconciled with the well-known business judgment rule, and whether lawsuit can be maintained by third parties. Thus, evaluation by a judge must be more extensive, given that the fiduciary duties and the procedure that leads to making the relevant decisions are more complex. After examining the role of courts, the article discusses whether and on what terms third parties may act against the directors of a benefit corporation if they feel that their interests have been harmed. It is suggested that, in specific cases, it is possible to grant protection to third parties who have relied legitimately on what is indicated in the articles of incorporation or by-laws of a benefit corporation. Even if the legal claims of third parties can be accepted, they are limited in light of the broad formulations adopted in the articles of incorporation or by-laws and in light of the significant burden of proof on the plaintiffs, so as to avoid the risks that recourse to judicial remedies could create.

The Inequities of Equitable Subordination

The Supreme Court originated the doctrine of equitable subordination to reform contracts by prioritizing the claims of innocent creditors over those of creditors who engage in malicious misconduct. In recent decades, though, equitable subordination has devolved into a standardless doctrine under which judges sometimes subordinate claims in a no-fault manner according to their personal views of equity. The resulting uncertainty distorts commercial expectations and raises the cost of credit. Bold action is needed to correct this distortion. To that end, this Article reconceptualizes equitable subordination by analyzing how the doctrine should be reformulated to protect innocent creditors, while penalizing misconduct and preserving commercial expectations. Among other requirements, it argues that courts should adhere to a fault-based doctrine and that they should assess misconduct by a business judgment rule, similar to how courts assess corporate governance. Accordingly, courts should only find non-insider creditors, who are not otherwise conflicted, to have engaged in misconduct—making their claims subject to equitable subordination—if there is no rational business purpose for their alleged misconduct. To give lenders sufficient clarity and ex ante guidance, the Article explains why the reformulated doctrine should be legislatively implemented. Congress could accomplish that by amending 11 U.S.C. § 510 along the lines proposed in the Appendix to the Article. Finally, the Article compares the related doctrines of recharacterization and equitable disallowance. Often conflated with equitable subordination, those doctrines are shown to be confusing and irrelevant. The Article argues for their elimination.

Directors’ Duty of Care in China: Empirical and Comparative Perspective

The adoption of director’s duty of care in the 2005 revision of the PRC Company Law made significant progress in holding directors accountable for their wrongdoings. However, certain defects still exist, most importantly the lack of a specific standard for the duty of care in the legislation. Therefore, this article adopts an empirical and comparative approach in reviewing Chinese duty of care cases in comparison with major jurisdictions such as the United Kingdom and the United States. The 86 sample cases hand-collected from the ten-year period from 2011 to 2020 reveal that the number of duty of care litigation in China is still far lower than other types of company disputes, despite an increasing trend. This article finds a divergence in judicial practice concerning at least two different standards of the duty of care, with an array of non-uniform factors considered in the judgments. Accordingly, this article adopts a selective approach concerning best practices in major jurisdictions globally and proposes several solutions specifically catered to China’s legal and commercial context, including the unified adoption of the objective reasonable person standard, the suggestion that a wholesale transplant of the business judgment rule is undesirable while some of its elements could be borrowed for reference, the shifting of evidentiary burden to the defendants and the promotion of director’s liability insurance. By incorporating these changes, China’s company law stands to benefit from striking an appropriate balance between director’s authority to manage the companies and shareholder’s right to hold them accountable.

Dodge v. Ford: What Happened and Why?

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and needed much cash for the just-begun construction of the River Rouge factory, which was said to be the world’s largest when completed. Second, to stymie union organizers and to motivate his new assembly-line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker buy-in. And, third, if Ford explicitly justified his acts as in pursuit of the monopoly profit in the litigation, the Ford brand would have been damaged with both his workforce and the car buyers. The transactions underlying Dodge v. Ford and resulting in the court order that a very large dividend be paid should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly line produced, with Ford’s business requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reconsidered. Ford had a true business purpose to cutting back the dividend—spending on labor and a vertically integrated factory to solidify his monopoly and splitting the monopoly profit with labor—but he would have jeopardized the strategy’s effectiveness by boldly articulating it. The existing main interpretations of the corporate law decision and its realpolitik remain relevant—such as Ford seeking to squeeze out the Dodge brothers by cutting the Ford dividend to deny the Dodge brothers cash for their own car company. But those interpretations must take a back seat, as none fully encompasses the industrial setting—of monopoly, incipient union organizing, and a restless workforce. Without accounting for Ford Motor’s monopoly, the River Rouge construction, and the related labor tensions, we cannot fully understand the Dodge v. Ford controversy. Stakeholder pressure can more readily succeed in a firm having significant economic rents, a setting that seems common today and was true for Ford Motor Company in the 1910s.

Duty and Diversity

In the wake of the brutal deaths of George Floyd and Breonna Taylor, a slew of reforms from Wall Street to the West Coast have been introduced, all aimed at increasing Diversity, Equity, and Inclusion (“DEI”) in corporations. Yet the reforms face difficulties ranging from possible constitutional challenges to critical limitations in their scale, scope and degree of legal obligation and practical effects. In this Article, we provide an old answer to the new questions facing DEI policy, and offer the first close examination of how corporate law duties impel and facilitate corporate attention to diversity. Specifically, we show that corporate fiduciaries are bound by their duties of loyalty to take affirmative steps to make sure that corporations comply with important civil rights and anti-discrimination laws and norms designed to ensure fair access to economic opportunity. We also show how corporate law principles like the business judgment rule do not just authorize, but indeed encourage American corporations to take effective action to help reduce racial and gender inequality, and increase inclusion, tolerance and diversity given the rational basis that exists connecting good DEI practices corporate reputation and sustainable firm value. By both incorporating requirements to comply with key anti-discrimination laws mandatorily, and enabling corporate DEI policies that go well beyond the legal minimum, corporate law offers critical tools with which corporations may address DEI goals that other reforms do not—and that can embed a commitment to diversity, equity, and inclusion in all aspects of corporate interactions with employees, customers, communities, and society generally. The question therefore is not whether corporate leaders can take effective action to help reduce racial and gender inequality—but will they?

Business judgment rule to directors against personal liability for breaches of some of their duties

This article examines the extent to which s 76(4)(a) of the Companies Act 71 of 2008 protects directors against personal liability for breaches of their duties to act in the company’s best interests, with due care, skill and diligence. The essential substantive elements of s 76(4)(a) create (as a minimum) a business judgment rule. Generally, that rule provides a director with a defence against liability for a breach of his duty of care, skill and diligence if, when he acted (or omitted to act), he did so reasonably, honestly, with no self-interest and in the interests of the company. In analysing s 76(4)(a) as an embodiment of features of a traditional business judgment rule, this article briefly discusses how a similar rule in Australia is drafted and applied in practice by their courts. The article concludes that s 76(4) (a) creates protection for directors that is more than the protection that is provided by a traditional business judgment rule. This conclusion is based on the extensive nature and scope of authority and powers which s 66(1) of the Act grants to directors. In the same breath, however, s 76(4)(a) manages to make directors appropriately accountable to the company’s stakeholders, in keeping with some of the fundamental objectives and purposes of the Act.

SPAC Attack: An Examination of SPAC Director Compensation and Its Legal Implications

Special Purpose Acquisition Company (“SPAC”) directors are compensated with economic ownership of founders shares, shares which have value if the SPAC combines with an operating business and which expire worthless if that does not occur. By analyzing the public filings of the 248 SPACs that IPOed in 2020, I create a dataset of SPAC director compensation, which is the first of its kind. I find that a director of the median SPAC receives approximately 30,000 founders shares (estimated value $300,000) and a director of the average SPAC receives approximately 40,000 founders shares (estimated value $400,000). I then demonstrate how the current director compensation subjects SPACs and their directors to greater litigation risk under Delaware law. Specifically, SPAC directors may not be considered independent under Delaware law because of the structure and quantum of compensation via founders shares. Furthermore, under Delaware law, if SPAC directors are not independent, legal claims surrounding the SPAC merger may be examined under the exacting entire fairness standard rather than the deferential business judgement rule because potential procedural safeguards of the SPAC, such as the shareholder vote, may not be sufficiently “cleansing.” Finally, I propose changes in SPAC director compensation to improve director independence.

The Three Faces of Control

Controlling shareholders are subject to distinct legal obligations under Delaware law, and thus Delaware courts are routinely called upon to distinguish “controlling shareholders” from other corporate actors. That is an easy enough task when a person or entity has more than 50% of the corporate vote, but when a putative controller has less than 50% of the vote – and is nonetheless alleged to exercise control over corporate operations via other means – the law is shot through with inconsistency. What is needed is a contextual approach that recognizes that the meaning of control may vary depending on the purpose of the inquiry. Under Delaware doctrine, the controlling shareholder label subjects that entity to unique legal treatment along three distinct dimensions. First, controlling shareholders – unlike minority shareholders – have fiduciary duties to the corporation. Second, interested transactions with controlling shareholders – unlike interested transactions with other fiduciaries – are subject to a unique cleansing regime in order to win business judgment deference from reviewing courts. Third, when certain transactions involving sales of control are challenged in court, they may be treated as direct rather than derivative actions, even when similar transactions that do not involve control sales would be treated as purely derivative. By teasing out these three aspects of the legal framework and analyzing them separately, courts can more closely attend to the reasons why control carries special significance, and ultimately develop a more rational and consistent set of definitions. Most critically, courts may properly designate someone a controlling shareholder for some purposes, but not others.

Miskonsepsi Pembebanan Tanggung Jawab kepada Direksi Badan Usaha Milik Negara dalam Jerat Tindak Pidana Korupsi

The dualism of the conception of state assets separated in State-Owned Enterprises (SOEs) in Indonesian legislation raises a polemic in the operation of SOEs as a business entity. In essence, in Act Number 19 of 2003 concerning SOEs, separated state assets no longer include state assets and their development and management are based on sound corporate principles. Meanwhile, in Law Number 17 of 2003 concerning State Finance, it is stated that one of the state finances is state assets separated from SOEs. Therefore, if it is related to the enactment of Law Number 31 of 1999 concerning Eradication of Corruption, SOEs that suffer losses can be charged with criminal acts of corruption because they have harmed state finances. By using the juridical-normative method and literature study as data collection techniques, the results of this study confirm the nature of BUMN as a company that is separate from its shareholder, namely the state. This research also encourages the use of Business Judgment Rule principle in proof as an effort to protect all actions of the Directors of BUMN that have a good intention to run a BUMN that suffers losses.

Legal Transplants, Law Books, and Anglo-American Corporate Fiduciary Duties

This article explores legal transplants and divergences in Anglo-American corporate fiduciary law. The internal management rule in English law acts to restrict judicial interference in corporate governance disputes. It is conceptually similar to the business judgment rule but the two remain distinct. This article explains why Anglo-American corporate law developed differently, despite its shared roots. It pinpoints the origins of the internal management rule to Lord Lindley’s work, which was written in the late nineteenth century. Lord Lindley was central to the development of corporate law in England and other common law jurisdictions within the British Empire but his jurisprudence was not influential in the United States. By this stage in the nineteenth century, the body of American scholarship was sufficiently well developed. Lindley’s text, despite its failure to stimulate American doctrinal development, was well read in the United States. Even so, judges and corporate lawyers in the United States took their inspiration from English law at the time of the founders.

KELEMAHAN NORMATIF PENGATURAN TINDAK PIDANA DALAM PASAL 2 DAN PASAL 3 UNDANG-UNDANG NOMOR 31 TAHUN 1999 TENTANG PEMBERANTASAN TINDAK PIDANA KORUPSI DAN PERUBAHANNYA SERTA UPAYA PENYEMPURNAANNYA DALAM RANGKA PEMENUHAN KEWENANGAN DIREKSI BUMD YANG BERBENTUK

The results of this research are as follows: First, Article 2 and Article 3 of the Anti-Corruption Act does not meet the principles in the formulation of a crime namely lex certa (must be clear and not multiple interpretations) and lex stricta means the formulation of the criminal act must be interpreted firmly and strictly and is prohibited from analogizing so it is not prohibited from analogizing. reflecting legal certainty and contradicting Article 28 D paragraph (1) of the 1945 Constitution of the Republic of Indonesia. The limitation for the Board of Directors to achieve legal certainty and justice is the application of the Business Judgment Rule principle as regulated in the Limited Liability Company Law. Law enforcers must always pay attention and uphold the principle of legality in law enforcement, which reflects legal certainty.Key words: Corruption Crime, Board of Directors Authority, Regional Owned Enterprises (BUMD) Persero Company.