The business judgment rule in Florida - on paper and in the trenches.

• Author: Carroll, James F.

Enron, Worldcom, Tyco Industries (of $15,000 umbrella-stand fame), and other corporate scandals notwithstanding, the business judgment rule remains alive and kicking in Florida. The business judgment rule protects directors from personal liability for most of their actions. The rule seemed headed for life support in the wake of all the highly publicized corporate boardroom scandals and passage of the federal Sarbanes-Oxley Act of 2002, but last August the rule seemed to gain a new lease on life, at least for the time being, thanks to an important Delaware court decision.

Although its tenets are business-friendly, the business judgment rule presents hard challenges in litigation both for counsel representing defendant directors and counsel representing plaintiff shareholders (or others). In the practical litigation world (the trenches), the protections of the business judgment rule are not always what they are cracked up to be. Motions to dismiss claims implicating the rule are often hard to win, motions for summary judgment harder. Claims implicating the business judgment rule make it to the courthouse steps more often than might be expected. At trial, a lawyer can expect to face a judge with little experience in the rule's operation, and a jury with no experience (but with lots of experience hearing about Enron and other recent infamous corporate abuses). Practitioners have to plan accordingly.

The Business Judgment Rule Now

The business judgment rule is a principle of substantive corporate law that presumes a corporate director has acted in good faith. The rule evolved in Florida from common law. Now it is mostly codified in F.S. [subsection] 607.0830 and 607.0831, primarily in the latter. (1)

Section 607.0830 provides that a director must discharge his duties in good faith, with ordinary care, and in a manner he believes in the best interests of the corporation. But breaching one of these duties does not by itself necessarily make a director liable for damages. Under the business judgment rule, a director cannot be liable for damages unless the plaintiff also shows that the director's breach of his duties--be it in a statement, vote, decision, or failure to act--constitutes a knowing criminal violation, a transaction involving an "improper personal benefit" (e.g., self-dealing), willful misconduct, recklessness, or an act/ omission committed in bad faith or maliciously. F.S. [section] 607.0831. (2) Proving gross negligence is not enough. (3) Section 607.0831 applies only in actions for money damages, not actions in equity such as for injunctive relief or rescission. This section applies to all types of claims for damages.

As developed in the common law, and now codified by statute, the business judgment rule generally prevents a court, which may possess less business expertise than corporate directors, from calling directors to account for their actions--or inaction--no matter how poor their business judgment. (4)

Although the business judgment rule, particularly as it developed in the common law, has been described as a "presumption" against director liability, it is not a classical evidentiary presumption. "In using the word 'presumption' or 'presumed' in articulating the business judgment rule, the courts have not intended to create a presumption in the classical procedural sense.... Rather, the courts are merely expressing the substantive rule of director liability." (5) In other words, "presumption" here means it is going to be hard for the plaintiff to prove that a director breached his fiduciary duties or committed some other wrong for which he may be held liable.

The business judgment rule statute does not state elements of a cause of action against directors. Section 607.0831 imposes no duties or any causes of action against directors. (6) Instead, its purpose is to protect directors from personal liability, and to identify the situations in which that protection could be lost. (7)

Principles similar to the business judgment rule apply to actions by officers--but as a matter of common law rather than pursuant to [section] 607.0831. (8)

Historically, Delaware has led in the development of corporate law...