Thursday, June 1, 2006

Telman on the Business Judgment Rule, Disclosure and Executive Compensation

Valpo_1Jermey Telman (Valparaiso) has posted on SSRN his new piece entitled: The Business Judgment Rule, Disclosure and Executive Compensation.

From the abstract:

Despite its ubiquity in corporate law, the business judgment rule remains a doctrinal puzzle. Both courts and scholars offer different understandings of the Rule's role in litigation brought against corporate directors and different justifications for its deployment to insulate such directors from liability for breaches of fiduciary duties.

This Article rejects all existing justifications for the Rule and argues that the Rule is no longer needed to protect directors from liability, either because the justifications offered never made any sense or because directors are now protected by other, statutory means. Rather, the Rule is needed today to protect not directors but the corporations they serve from the irreparable harm corporations would suffer if forced to disclose prospective business plans in order to defend decisions taken by their boards.

This Article follows some recent scholarship in arguing that the Rule is best understood as an abstention doctrine and argues that courts should invoke the Rule and abstain from the review of the business judgment of corporate directors when the litigation that gives rise to such review would compel the corporation to disclose information relating to its prospective business plans. The Article then illustrates why the Rule should not apply in cases involving challenges to board decisions relating to executive compensation through a detailed discussion of the on-going litigation relating to the hiring and dismissal of the Walt Disney Company's former President, Michael Ovitz.

You can download this thought-provoking and potentially controversial article here.


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