Bernard S. Sharfman is an associate fellow of the R Street Institute and a member of the Journal of Corporation Law’s editorial advisory board. This post is based on Prof. Sharfman’s recent paper, and is part of the Delaware law series; links to other posts in the series are available here.
The business judgment rule (Rule), the most prominent and important standard of judicial review under corporate law, protects a decision of a corporate board of directors (Board) from a fairness review (“entire fairness” under Delaware law) unless a well pleaded complaint provides sufficient evidence that the Board has breached its fiduciary duties or that the decision making process is tainted, such as with a lack of independence or interestedness. [1] Yet, anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the Rule is so important.
To provide a better understanding of the Rule’s importance, my paper, The Importance of the Business Judgment Rule, takes the approach that the Aronson formulation of the Rule [2] is not the proper starting place for its explanation. The Aronson formulation is a common starting point because it includes an aspect of the duty of care, the need for a Board to make a decision “on an informed basis,” that was not found in prior formulations used by the Delaware Supreme Court. Yet, starting with the Aronson formulation is like staring in the middle of a story, with much to be lost in its understanding.
