Title

Galactic Stupidity and the Business Judgment Rule

Abstract

The article examines whether the business judgment rule allows courts to review the substantive wisdom of decisions made by corporate directors. Although the conventional view among legal scholars is that the business judgment rule precludes such review, the article concludes that Delaware courts must sometimes examine the substance of directors’ decisions in order to determine whether those directors acted in good faith. Where the evidence shows that a director acted in a rational way (and therefore in good faith) in arriving at a decision, courts will not review the substance of that decision. However, where a director made a decision with no apparent rational deliberation, courts will examine whether the substance of that decision itself merits the rule’s protection. This is precisely what the Delaware Court of Chancery did, for example, in its 2005 holding in the case involving the Disney board of directors’ decision to approve its President’s $140 million severance package. The article concludes that the business judgment rule allows review of some directors’ decisions in order to determine whether those decisions are so substantively bad that they constitute “galactic stupidity” on the part of the directors – and therefore bad faith.

Disciplines

Corporation and Enterprise Law

Date of this Version

March 2006