Business Judgment Rule Protection for Corporate Officers? We’ll See.

A recent case out the Central District of California is getting some attention and caught my eye. In Federal Deposit Insurance Corp. v. Perry (C.D. CA December 13, 2011), the district court held that the business judgment rule does not apply to decisions of corporate officers as a matter of California law. After a rather laborious reading of §309 of the California Corporations Code (codifying the BJR) and its legislative history, the Central District concluded that the architects of the California statutory BJR intended to expressly exclude corporate officers from its benefits. Fair enough.

Here’s what I found interesting … .

First, Perrywas decided on a Motion to Dismiss, and in any event is not your average, run-of-the-mill corporate dispute. The officer in question was the CEO of Indymac, accused by the FDIC of driving said bank into receivership via massive subprime mortgage losses. Not exactly a poster child for the application of the business judgment rule to corporate officer decision making. On the theory that bad facts make bad law, I’m personally going to take a wait-and-see approach as to how California law develops on this front.

Second, it’s interesting that Delaware law is only modestly more developed on this issue. In Delaware - by proclamation of the Delaware Supreme Court just two years ago in Gantler v. Stephens (965 A.2d 695 (Del. 2009)) – corporate officers owe the same fiduciary duties (care and loyalty) as directors. While the notion of officers’ fiduciary duties had long been presumed through a labyrinth of dicta and conventional wisdom, Gantler was actually the first statement of this principle as a matter of Delaware law. As I recall, Gantler was – at the time - perceived as leaving a something of a debris field in its wake: For example, the Delaware statutory liability shield applied (and still applies) only to directors. Further, the dearth of Delaware case law regarding the fiduciary duty of officers created (and still creates) doubt as to how those duties are to be interpreted and discharged. To the latter point, officers follow the directions of the board and/or superior officers, setting the stage for a conflict between self-preservation (i.e., following orders and keeping your job) and the affirmative duty to act in the corporation’s best interests.

So what’s an officer to do?

Well, in Delaware, Gantler implies but does not hold that corporate officers enjoy the protections of the business judgment rule. IMO, a terrific pre-Gantler piece from The Business Lawyer gets it right: The BJR … (1) protects the actions of officers within the scope of their “delegated discretionary authority” (my emphasis), but (2) does not protect mutiny, i.e., actions of officers in derogation of their job responsibilities. In other words, the board is primary, the BJR protects its good faith judgments in pursuit of legitimate corporate interests, and corporate officers are the implementers of those judgments. To the extent officers have discretionary authority in that implementation, the BJR applies.

In California, there’s not much to be said beyond “consider moving the corporate domicile to Delaware.” And there are a lot of reasons to do that …

© david jargiello 2012 all rights reserved

First Posted January 27, 2012, Re-Posted March 6, 2012