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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
Under the “business judgment rule”, the courts are barred from intruding into the business judgments of the corporation, when the same are made in good faith. (Angeles Balinghasay vs. Cecilia Castillo, G.R. No. 185664, April 8, 2015)
The Business Judgment Rule is like a shield that protects corporate decision-makers from being second-guessed by the courts, as long as they act honestly and reasonably. As long as you’re playing fair and not making reckless moves, the courts won’t step in and tell you how to play.
This rule recognizes that those running a company usually have the best understanding of its needs and challenges, so it’s up to them to call the shots.
What is the Business Judgment Rule?
The Business Judgment Rule serves as a cornerstone principle in corporate governance, providing a framework for decision-making by boards of directors and officers. Defined through a series of judicial interpretations, this rule essentially shields corporate decision-makers as long as they act in good faith and with reasonable care.
In the catena of cases decided by the Supreme Court, the Business Judgment Rule is defined as follows:
- Under the “business judgment rule,” the trial court cannot undertake to control the discretion of the corporation’s board as long as good faith attends its exercise.
It is clear that under the “business judgment rule”, the courts are barred from intruding into the business judgments of the corporation, when the same are made in good faith. (Angeles Balinghasay vs. Cecilia Castillo, G.R. No. 185664, April 8, 2015)
- Contracts intra vires entered into by the board of directors are binding upon the corporation, and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority.
Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with the courts.
The “business judgment rule” simply means that “the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. (Metroplex Berhad and Paxell Investment Limited vs. Sinophil Corporation, G.R No. 208281, June 28, 2021)
In essence, courts refrain from intervening in the decisions of corporate boards as long as those decisions are made in good faith and are within the scope of the directors’ authority. This recognizes that those tasked with managing a company’s affairs are often in the best position to assess its needs and risks. As articulated in various legal rulings, courts are generally reluctant to interfere with the business judgments of corporations, deferring instead to the expertise and discretion of those entrusted with corporate stewardship.
The Exception to Business Judgment Rule
While the Business Judgment Rule provides a significant degree of latitude to corporate decision-makers, it is not without limitations. The rule does not shield directors from liability in cases of gross negligence or bad faith. If it can be demonstrated that a director acted recklessly or with malicious intent, courts may set aside the protections afforded by the Business Judgment Rule and hold the individual accountable for their actions.
Moreover, the rule does not extend to decisions that are patently unreasonable or that result in harm to minority shareholders. In such cases, where the interests of the corporation or its stakeholders are compromised, courts may intervene to safeguard those affected by the board’s actions.
The Business Judgment Rule serves as a foundational principle in corporate governance, empowering directors and officers to make decisions in the best interests of their companies. While this rule affords considerable discretion to corporate decision-makers, it is not absolute and is subject to scrutiny in cases of misconduct or negligence.
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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