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CASE IN POINT: The Business Judgment Rule Won’t Protect Boards That Ignore Their Professionals’ Advice

Peter Massa
Partner, Armstrong Teasdale

The business judgment rule has been around in corporate law for a long time. The theory is that board decisions will not be second-guessed by the courts — provided they’re made in furtherance of the corporation's legitimate interest and in accordance with the recommendation of the corporation’s professionals and the governing documents.

It’s not failsafe. The caveat here is you generally don't have business judgment rule protection if you're acting in bad faith, outside of the board's authority and against what your governing documents say, or if you’re not following the advice of your professionals.

Case study. I represented a condominium that had fireplaces in the apartments. When it was discovered that the chimneys weren't properly lined and fireproofed, engineers told the board it had to get this done because it’s a life-safety issue. The board was facing potential litigation on two fronts — one group didn’t want to spend the money because the fireplaces had never been a problem, and another group threatened to sue if the board did this because it was going to be a big assessment.

The legal lesson. I advised the board to rely on the advice of the engineers. If someone sued, I believed the board’s decision would be upheld because of the business judgment rule. That case never actually went to litigation, but that's generally how it is applied. If you can show in court that you were trying to do what was best for the corporation or condominium — even if it was wrong — courts generally will grant you broad leeway.

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