CHAPTER 06 Directors’ Duties and Defensive Mechanisms
BUSINESS JUDGMENT RULE – The business judgment rule protects business decisions that have been made by the board of directors honestly, prudently, in good faith and on reasonable grounds. In these cases, the board’s decisions will not be subject to judicial review of the merits of the business decision, and a court will generally give deference to the business judgment of directors, so long as the decision lies within a range of reasonable alternatives. – “Honestly, prudently, in good faith and on reasonable grounds” means that directors must exercise their judgment (i) free of any conflict of interest; (ii) on the basis of a full understanding of all relevant facts and with the benefit of expert advice; and (iii) in the best interests of the corporation and not for an improper purpose. – If a board of directors has acted on the advice of a committee composed of persons having no conflict of interest and the committee members have exercised their judgment in compliance with the foregoing principles, the business judgment rule will apply to protect the business decisions of the board of directors. INDEPENDENT COMMITTEE – If circumstances indicate a real threat of an offer or if an offer is made, the board should consider whether to establish an independent committee composed of non-management directors. – The independent committee will assess any offer and develop recommendations for the full board with respect to the offer and any potential alternatives and, depending upon the circumstances, will negotiate or supervise the negotiations with the bidder or others. OPPRESSION REMEDY – Corporate conduct that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, any securityholder, creditor, director or officer can be challenged under the statutory oppression remedy. – The complainant must demonstrate that it had a reasonable expectation that has been violated by the corporate conduct at issue. – Factors that are relevant in determining whether a reasonable expectation exists include general commercial practice, the nature of the corporation, the relationship between the parties, past practice, steps the complainant could have taken to protect itself, representations and agreements and the fair resolution of conflicting interests between corporate stakeholders.
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