Dissertation > Political, legal > Legal

Discrimination of the Relationship Between the Directors’ Duty of Care and Business Judgment Rule in American Corporate Law

Author LiFeiFei
Tutor YuYing
School Jilin University
Course Legal
Keywords The Directors’ Duty of Care Elements of Judgment Business Judgment Rule Basis of Legitimacy The Standards of Judicial Review
Type Master's thesis
Year 2012
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In recent years, with the maturity of the socialist legal system and the marketeconomy, our country enterprises face the challenges of economic globalization afterChina in accession to the WTO. Market competition is so fierce and the operatingrisks of company always exist. The revised "Corporate Law" of our country in2005has great progress in the realization of shareholders’ equity and company autonomy.The provision of article148provides the directors’ duty of care, but the provisiondoes not concrete and obscure. It is important to clarify the definite implication of thedirectors’ duty of care and its elements of judgment with the increase of the litigationcases. As our country’s new "corporate law" has not specific regulation, so we canonly search for its specific standards from foreign related laws. American CorporateLaw locates in a leading position of the world and has more research to the directors’duty of care. The relationship between Business Judgment Rule and the directors’duty of care are extremely intimate. Business Judgment Rule is a case law used byU.S. courts in the long-term of the judicial practice. It is a standard of judicial reviewto rule out the court making a virtual investigation as to the directors’ duty of care. Sothe study of the relationship between Business Judgment Rule and the directors’ dutyof care is very significant.The author uses empirical analysis method in this paper to outline AmericanCorporate Law about the directors’ duty of care and Business Judgment Rule of therelevant provisions. The directors’ duty of care and Business Judgment Rule arediscussed in detail on the definition, history development situation, the standard ofjudgment and basis of legitimacy and so on. In addition, the author find that thedirectors’ duty of care and Business Judgment Rule are different, but both of themcontact closely in terms of seeing the court cases of United States and analyzingapplicable conditions of Business Judgment Rule and standards of the directors’ duty of care.First of all, the author analyzes the definition and standards of the directors’ dutyof care. The directors’ duty of care requires that a director out of goodwill processingcompany affairs, and fulfilling the ordinary people in the similar status and situation,should have cautious note and diligence. It is a standard that director of companyperforms his duties and there is not any conflict of interests between director andcompany. The board of directors should know all the relevant and reasonableinformation before making decisions and perform their obligations. The judgmentelements of the directors’ duty of care include: the directors of company attend themeeting and know the topic of the meeting in advance; they not only should masterthe sufficient and reasonable information, but also have the duty to investigate theauthenticity and rationality of information to make the proper decision. In addition,there are a few references to judge whether directors have violated obligation, such asthe difference between the executive directors and non-executive directors, seniorexecutives of the company and the nature of the company. Overall, the standards ofthe directors’ duty of care just said to a standard of “ordinary prudent person”, but itis so fuzzy. The court had many difficulties to determine whether the director fulfillshis duty of care, so Business Judgment Rule produced.Secondly, the author makes a deep analysis and discusses on the BusinessJudgment Rule of the relevant regulations and the basis of legitimacy. As a legalprinciple, Business Judgment Rule didn’t exist in any one statute law so far. InAmerica, each state has different understanding of this rule and there is a controversybetween legislation and academia. American Law Institute provides an explicitdefinition of Business Judgment Rule in “Principles of Corporate Governance:Analysis and Recommendations”. It is considered the most authoritative definition.The directors make decisions with cautious note and diligence and there is not anyconflict of interests between director and company. They believe the businessjudgment in line with the company’s best interests. The courts use this rule more andmore in American case law, we can see the rule has its certain basis of legitimacy.Business judgment rule can distinguish the fault of the managers and managementerror, which embodies the law respect the director of management control. At the same time, the rule encourages director adventure to a certain extent and prevents thejudge to the business excessive intervention.Finally, the author provides a comprehensive analysis on the relationshipbetween the directors’ duty of care and Business Judgment Rule combined withAmerican case law of the relevant cases. The author agrees with the viewpoint thatBusiness Judgment Rule is an important supplement to the directors’ duty of care andboth of them are not consistent. But Business Judgment Rule is just a standard ratherthan rule to rule out the court of judicial review. The directors’ duty of care andBusiness Judgment Rule are different because they don’t have the same backgroundand applicable occasions and elements of judgment.Business Judgment Rule is not an exempt means when the director violated theirduty of care, but it is an important supplement in function to the directors’ duty ofcare. It is just a standard of excluding judicial review to judge whether the directorsbreach their duty of care.

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