Tuesday, September 16, 2008
As business judgment rule officianados already know, I am a proponent of Stephen Bainbridge's abstention theory of the business judgment rule (BJR). Well, sort of. Actually, I think the BJR is no longer necessary to protect directors, because they are statutorily protected (and how!), but it is necessary to protect corporations from forced disclosure of prospective business plans. And here is where I follow Bainbridge: when applied, it should be applied as a doctrine of abstention, not as an evidentiary presumption or a heightened standard of review.
There are many cases that illustrate Bainbridge's claim that courts already treat the BJR as a doctrine of abstention, and Kamin v. American Express Company, and Shlensky v. Wrigley are surely among the best examples. The idea is simple. In order to get around the BJR, plaintiffs must allege either that the Board made no decision whatsoever or that its decision was tainted by illegality or a conflict of interest. I don't mention waste because, as Chancellor Allen pointed out, a successful waste claim is sighted as often as the Loch Ness monster. If plaintiffs don't allege illegality or conflict of interest, the court simply defers to the business judgment of board, so long as there was an exercise of business judgment.
In Kamin, American Express made an investment that declined significantly in value. Rather than selling the de-valued stock and realizing an $8 million tax benefit, the board decided to distribute the stock to its shareholders as an in-kind dividend. The board attempted to justify this decision with the claim that reporting the loss would have a negative impact on American Express's stock price, but that's absurd. The market already knew of the loss and, under the efficient capital markets hypothesis, the loss was already incorporated into the stock price. The real motivation behind the in-kind dividend was probably earnings management, but plaintiffs didn't press that theory, or the court wouldn't hear it. Too bad. Evidence of earnings management would have suggested a conflict of interest and thus gotten around the BJR. Instead, the court said, in effect, you haven't alleged self-interest or illegality and so as long as the board has given a reason (even a ridiculous reason), the court must defer to that judgment and abstain from review.
As you will note below, I have made a decision about the pronunciation of the plaintiff's name. If you think I'm wrong about that, write your own stinkin' Limerick!!
Kamin v. American Express Co.
There once was a plaintiff named Kamin
Who showed errors of judgment most damnin'.
But without breach of duty,
Though the goof be a beauty,
The court must refuse to examine.