Opinion ID: 615595
Heading Depth: 4
Heading Rank: 2

Heading: Policy Justifications for Deferential Standards of Review

Text: Whether a standard of conduct such as ERISA's prudent man standardis judicially enforced turns on the standard of review used to test the legality of the conduct at issue. In many contexts, the two standards are aligned. For instance, the standard of conduct that governs automobile drivers is that they should drive carefully, and the standard of review in a liability claim against a driver is whether he drove carefully. Melvin Aron Eisenberg, The Divergence of Standards of Conduct and Standards of Review in Corporate Law, 62 FORDHAM L.REV. 437, 437 (1993) (internal footnote omitted). In such instances, the governing standard of conduct retains its bite. In other areas of the law, however, prudential judgment counsels in favor of adopting a standard of review that is more lenient than the applicable standard of conduct. See id. Corporate law provides a useful example. As a normative matter, directors of a corporation are generally expected to perform their functions in good faith, and with the degree of care that an ordinarily prudent person in a like position would use under similar circumstances. See, e.g., N.Y. BUS. CORP. LAW § 717(a). This standard of conduct is fairly demanding, but the standard of review used to test whether directors are liable for violating the duty of due care is less stringent. See Eisenberg, supra, at 441. Under the business judgment rule, directors are entitled to a presumption that, in making a business decision, they 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. See, e.g., Dist. Lodge 26, Int'l Ass'n of Machinists & Aerospace Workers, AFL-CIO v. United Techs. Corp., 610 F.3d 44, 52 (2d Cir.2010). Considerations of fairness and policy led to the adoption of this deferential standard. Eisenberg, supra, at 443. Business judgments are often made on the basis of incomplete information and in the face of obvious risks. Id. at 444. A reasonableness standard of review could thus discourage directors from making bold but desirable decisions, and might even deter directors from serving at all. Id. In addition, courts are ill-equipped to determine after the fact whether a particular business decision was reasonable under the circumstances. William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a Standard of Review Problem, 96 NW. U.L.REV. 449, 452 (2002). Examining directors' decisions under a standard of review that is more lenient than the relevant standard of conduct thus furthers important public policy values. Id. at 449.