Skip to content
Man in suit crossing his arms in front of a crowd of his peers

Fiduciary Duty Litigation: Part 2

The Business Judgment Rule

So, how does a majority shareholder, officer, or director of a corporation avoid a trap? The answer is to exercise sound business judgment, in good faith, and in a fair and rational fashion, with input from a disinterested board of directors. 

Ohio law has long since recognized “the rights of the majority to exercise control over the corporate affairs to which ownership of their shares entitled them.” Armstrong v. Marathon Oil Co. (1987), 32 Ohio St.3d 397, 402, 513 N.E.2d 776, 782. “Ohio courts adhere to the ‘business judgment rule,’ and will not inquire into the wisdom of actions taken by majority shareholders, directors or officers in the absence of fraud, bad faith or abuse of discretion * * *. [T]he business judgment rule recognizes that many important decisions are made under circumstances of uncertainty, and it prevents courts from imposing liability on the basis of ex post judicial hindsight and lowers the volume of costly litigation challenging the directorial actions.” Radol v. Thomas (C.A.6, 1985), 772 F.2d 244, 256.

The protection of the business judgment rule can only be “claimed by disinterested directors.” Gries Sports Ent., Inc. v. Cleveland Browns Football Co. (1986), 26 Ohio St.3d 15, 20, 26 OBR 12, 16, 496 N.E.2d 959, 964. “Disinterested directors” does not mean indifferent directors, or directors with no stake in the outcome. If that were so, shareholders could never be directors or officers. Johnson v. Trueblood (C.A.3, 1980), 629 F.2d 287, 292 (“by the very nature of corporate life, a director has a certain amount of self-interest in everything he does”); Asarco, Inc. v. Court (D.C.N.J.1985), 611 F.Supp. 468, 473 (“the fact that Asarco directors own stock * * * is not sufficient to deprive their decision of the benefit of the business judgment rule”).

Disinterested directors are those who “neither appear on both sides of the transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves [641 N.E.2d 273] upon the corporation or all stockholders generally.” Gries, supra, 26 Ohio St.3d at 20, 26 OBR at 17, 496 N.E.2d at 964. The decisions of disinterested directors will not be disturbed if they can be attributed to any rational business purpose. Id. “The burden is on the party challenging the decision to establish facts rebutting the presumption” of good faith of directors invoked by the business judgment rule. Id.

If you have questions regarding your rights and responsibilities as an owner, officer, director, manager, or partner of a business entity, please reach out to request a consultation or visit David’s bio for his contact information to reach out to him directly, or give us a call at 216-696-1422.

Author

Share this post:

Facebook
Twitter
LinkedIn
Email

Related Posts