Joan sits on the board of directors for a large bank, ManBank, located in New York City.
Bob, a friend of Joan’s, is looking to start a new airline business and is looking for a loan for $300 million dollars. Joan researches Bob's background and finds that, Bob worked as an assistant regional manager for a mid-western airline company for 12 years and during that time, Bob's region increased sales by 28%.
Joan recommended that ManBank gives Bob the $300 million loan, using the airplanes owned by Bob's new airline company as collateral. The board accepted her recommendation and gave Bob the loan. Three years later Bob went bankrupt and defaulted on the loan. The bank was only able to recover $150 million.
The shareholders brought a derivative lawsuit against Joan for, breach of her fiduciary duty of care, claiming that her research was deficient based on Bob's background and the state of the airline industry. They claim that she should have known that the venture was not likely to succeed.
The standard by which decisions of a board of directors of a business are to be reviewed by the courts is known as the business judgment rule. The business judgment rule provides that a board members action is protected from challenge if there is a good business justification for the decision and it isn't fraudulent or an abuse of discretion. When the business judgment rule is applied, the burden of proof to establish the impropriety of the decision is on those challenging it.
In the case United States District Court For The Southern District Of New York 683 F. Supp. 422; 1988 U.S. Dist. April 14, 1988 , the plaintiff filed a motion for injunctive and declaratory relief against defendants under an action claiming breach of fiduciary duty. The court denied plaintiff's motion without prejudice to renew because defendants' Board of Directors acted in good faith and thus were entitled to the benefit of the business judgment rule in the adoption of its Rights...
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