Opinion ID: 1952721
Heading Depth: 1
Heading Rank: 22

Heading: Business Judgment or Enhanced Scrutiny

Text: The defining tension in corporate governance today has been characterized as the tension between deference to directors' decisions and the scope of judicial review. [5] The appropriate standard of judicial review is dispositive of which party has the burden of proof as any litigation proceeds from stage to stage until there is a substantive determination on the merits. [6] Accordingly, identification of the correct analytical framework is essential to a proper judicial review of challenges to the decision-making process of a corporation's board of directors. [7] The business judgment rule, as a standard of judicial review, is a commonlaw recognition of the statutory authority to manage a corporation that is vested in the board of directors. [8] The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. [9] An application of the traditional business judgment rule places the burden on the `party challenging the [board's] decision to establish facts rebutting the presumption.' [10] The effect of a proper invocation of the business judgment rule, as a standard of judicial review, is powerful because it operates deferentially. Unless the procedural presumption of the business judgment rule is rebutted, a court will not substitute its judgment for that of the board if the [board's] decision can be `attributed to any rational business purpose.' [11] The business judgment rule embodies the deference that is accorded to managerial decisions of a board of directors. Under normal circumstances, neither the courts nor the stockholders should interfere with the managerial decision of the directors. [12] There are certain circumstances, however, which mandate that a court take a more direct and active role in overseeing the decisions made and actions taken by directors. In these situations, a court subjects the directors' conduct to enhanced scrutiny to ensure that it is reasonable, [13] before the protections of the business judgment rule may be conferred. [14] The prior decisions of this Court have identified the circumstances where board action must be subjected to enhanced judicial scrutiny before the presumptive protection of the business judgment rule can be invoked. One of those circumstances was described in Unocal: when a board adopts defensive measures in response to a hostile takeover proposal that the board reasonably determines is a threat to corporate policy and effectiveness. [15] In Moran v. Household , we explained why a Unocal analysis also was applied to the adoption of a stockholder's rights plan, even in the absence of an immediate threat. [16] Other circumstances requiring enhanced judicial scrutiny give rise to what are known as Revlon duties, such as when the board enters into a merger transaction that will cause a change in corporate control, initiates an active bidding process seeking to sell the corporation, or makes a break up of the corporate entity inevitable. [17]