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Friday, May 15, 2020 9:48:26 AM
Business Judgment Rule
In legal proceedings, the business judgment rule typically protects the CEO from the corporation's liabilities and losses. This rule basically states that a CEO is not personally responsible for the shareholders' losses if he acted honestly, openly and with the best interest of his company in mind. Under the business judgment rule, it is the responsibility of shareholders to demonstrate a CEO's failure to uphold his fiduciary responsibilities. In limited circumstances, such as the sale of the small business to a new owner, the business judgment rule does not apply, and it becomes the burden of CEOs and company directors to demonstrate that their actions were in the company's best interests.
Duties of Care, Loyalty and Disclosure
A CEO's legal responsibilities to his company's shareholders are broken down into three distinct fiduciary duties: the duty of care, the duty of loyalty and the duty of disclosure. The duty of care refers to the CEO's responsibility to consider all of the available information relevant to business decisions, including the advice of experts and employees. The duty of care also includes the responsibility to understand and evaluate the company's day to day operations and the terms of agreements. The duty of loyalty requires that a CEO always acts in the best interest of a business's shareholders, and that he places that interest above his own in business decisions. This includes the responsibility to avoid conflicts of interest. Finally, the fiduciary duty of disclosure mandates that a CEO fully inform both the board of directors and the shareholders about the major issues facing the business.
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