Business Judgement Rule
In retrospect, it is always easy to say that an accident was foreseeable, and hardly any other situation has shown this as clearly as the financial crisis. The Business Judgement Rule is intended to prevent managers from being punished by courts for negative business results despite cautious action.
Fear of decisions
The business judgement rule sets out rules for courts or judges on how they are to review the actions of the management and the board of directors. The latter often have to make difficult business decisions, which under certain circumstances may bring high profits but usually also entail significant risks. The launch of a new product line, for example, can put a lot of money in the till or drive a company to the brink of bankruptcy if the products do not achieve the desired success. Because boards of directors and managing directors are responsible for the damage (Art. 754 CO) they cause to a company, they must exercise caution when making business decisions. This rule is also quite sensible, as it prevents managers from taking too great a risk. However, an excessively strict liability regime carries the risk that managers may be reluctant to take worthwhile risks. Especially because it is always easy for outsiders to say with hindsight that a crisis was foreseeable. The business judgement rule is designed to prevent exactly this.
Judicial restraint
According to the business judgement rule, judges must exercise restraint in the subsequent review of management decisions. If certain criteria are met, managers are not liable even if their decisions have negative consequences for the company. The responsibility does not apply if the managers have made an independent and informed decision based on objective review criteria. This means that when making a (risky) business decision, the managers must not find themselves in a conflict of interest. This is the case when the self-interests of the managers and those of the company they manage do not conflict. Furthermore, the decision must be made on the basis of qualitatively and quantitatively sufficient information. The managers may therefore also need to seek expert opinions. In addition, a careful balancing of risks between the costs and benefits of a business decision must be carried out.
Documentation is crucial
In order to assess whether the criteria of the business judgement rule are fulfilled, the existence of a formal decision-making process is often taken into account in practice. In other words, it is checked whether the managing directors have implemented and applied a careful review system that is used when making risky trade-offs. Such a system not only simplifies decision-making, but also serves as documentation and thus contributes to the exclusion of liability. Consequently, conscientious documentation makes it easier for managers to prove to a court that they have acted with due diligence and have not violated their duties.
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