Citation(2016) 28 SAcLJ 428
Date01 December 2016
Published date01 December 2016

Making business decisions is a risky business. When carrying out their management obligations, directors have to make difficult business decisions which involve weighing uncertain risks and potential benefits to the company. As such, as with any other human lapses, it is inevitable that some of these decisions will turn out to be detrimental to the company. The contentious issue then is whether directors should be held personally liable for their (poor) decisions. This reflects the tension between providing directors with the leeway to make risky but potentially profitable management decisions for the company and holding directors accountable for their actions. The prevalent attitude taken by courts has always been one of not second-guessing business decisions on hindsight. Some countries have gone even further by enacting a formal “business judgment rule” which shields directors from liability if they were well informed, and made these decisions in good faith and in the absence of any conflict of interest. Although Singapore courts have recognised that they should be slow to interfere with commercial decisions, Singapore has not yet followed an emerging global trend of enacting a formal business judgment rule. Rather, it has a more informal business judgment rule. This paper utilises a comparative lens to examine the different formulations of the business judgment rule in leading corporate law jurisdictions and evaluate their effectiveness in protecting directors from personal liability. It argues that the impact of a business judgment rule depends not only on the specific formulation of it but also on the larger corporate governance framework (or, more generally, the context) present in different jurisdictions. Remaining cognisant of the importance of context, this paper then examines the various factors that may justify the adoption (or rejection) of a formal business judgment rule. Finally, the contextual considerations and reasons for adoption or rejection are discussed and applied to the Singapore context to determine if Singapore should indeed adopt a formal business judgment rule. Ultimately, it is suggested that Singapore should enact a specific format of a statutory business judgment rule as this would promote a

more favourable environment for doing business by bolstering the perception (if not the reality) of increased certainty in the law regulating business decisions in Singapore's boardrooms. This is especially so considering the rising level of derivative actions in Singapore.
I. Introduction

1 Being a director is highly esteemed, and it is clear that this position is not just another step up the corporate ladder of success. Indeed, directors are in the most important management position in a company. With management authority delegated to directors, the role of directors is to make and implement decisions to supervise the performance of the company. Indeed, s 157A(1) of the Singapore Companies Act1 provides that the “business of a company shall be managed by, or under the direction or supervision of, the directors”. This is why directors owe fiduciary duties and duties of care, skill and diligence to the company: they have a wide scope of authority and stand in a position of trust and responsibility.

2 While there is great efficiency and certainty in having directors solely engaging in corporate decision-making, there is also a pressing need for accountability. There is thus an inherent competing tension between the need to protect directors' authority and discretion to make decisions and the need to hold directors accountable for these decisions.2 As Nobel laureate economist Kenneth Arrow stated, “the power to hold to account is ultimately the power to decide”; hence, directors cannot be held accountable without having some of their authority diminished.3 However, courts have been generally reluctant to interfere with the business judgments of directors as it is seen that the boardroom, rather than the courtroom, is more suitable for reviewing

business decisions.4 Therefore, the business judgment rule is the courts' way of establishing a proper mix of efficiency and accountability, and is a necessary extension of this separation of ownership and control in a company.5

3 Although there are different formulations of the business judgment rule, the essence is that courts will not second-guess directors' decisions if the directors were well informed, not in a conflict of interest and acting in the company's best interests when making those decisions.6 This corresponds with what Arrow said about accountability taking the “form of ‘management by exception’, in which authority and its decisions are reviewed only when performance is sufficiently degraded from expectations”.7 There have been differing sentiments to the business judgment rule, with only some countries adopting it.8 Even among these countries, there have been different methods of incorporating the business judgment rule into the law of corporate governance. While some countries like Australia and Germany have codified the business judgment rule, other countries like the US, Japan and Canada have decided to develop the business judgment rule through judge-made law.9

4 In Singapore, there is no formal business judgment rule either by statute or case law. Instead, Singapore adopts a more informal version of the business judgment rule.10 Hence, this article aims to critically discuss whether there is a need for Singapore to adopt a formal business judgment rule.

5 The balance of this article will proceed as follows. First, the rationales and theories behind the business judgment rule will be

discussed.11 Next, the various models of the business judgment rule in different jurisdictions will be examined.12 The different factors which influence these countries to adopt varying models of the business judgment will then be analysed. In addition, the arguments for and against a formal business judgment rule will be examined in detail in the Singapore context to determine if Singapore should adopt one of the models of the business judgment rule or maintain its current position.13 In the conclusion, this article will argue that Singapore should adopt a codified version of the Delaware formulation of the business judgment rule as this model strikes the proper balance between the two paramount and competing concepts of efficiency and accountability.14
II. Definition of the business judgment rule
A. Theories behind the business judgment rule

6 There are two competing notions of the business judgment rule. The first theory is that the business judgment rule is a substantive standard of liability.15 The business judgment rule will not apply if the courts find that the directors have breached their duties of care.16 The rule, so conceived, entails “some objective review of the quality of the [board's] decision”.17

7 The other theory is that the business judgment rule is an abstention doctrine.18 Unlike the substantive standard of liability, the business judgment rule in the abstention doctrine does not state the director's scope of liability.19 Instead, it is a presumption that the courts will not adjudicate on the merits of directors' decisions20 unless the

directors did not abide by “appropriate decision-making procedures”.21 The plaintiff bears the heavy burden of rebutting this presumption.22

8 It is submitted that the business judgment rule is better treated as an abstention doctrine as a substantive standard of liability doctrine could easily make judicial intervention a norm.23 Under the substantive standard of liability doctrine, the business judgment rule does not shield directors who fall short of the expected standard of care.24 On the other hand, under an abstention doctrine approach, the business judgment rule precludes the plaintiff from contesting the very issue of whether the director had fallen short of the standard of care expected of her.25 This means that litigation is cut off before the court can even review the merits of the director's decisions.26

9 These two competing conceptions of the business judgment rule are present in US case law.27Shlensky v Wrigley28 (“Shlensky”) remains the classic illustration of the abstention doctrine approach29 while Cede & Co v Technicolor, Inc30 (“Cede”) demonstrates the trend of treating the business judgment rule as a substantive standard of liability.31 In Cede, although the court started off with explaining how the board of directors has management authority to run the company, it deviated from this attitude of non-interference with business decisions by stating that the business judgment rule is intended to “preclude a court from imposing itself unreasonably on the business and affairs of a corporation” [emphasis added].32 The court then identified the directors'

various breaches of their duties of care and concluded that the plaintiff had successfully rebutted the applicability of the business judgment rule.33

10 In contrast, in Shlensky, the court held that it would not review the merits of directors' decisions unless the directors were alleged to be involved in “fraud, illegality, or conflict of interest”.34 As such allegations were absent from the plaintiff's complaints, the court upheld the business judgment rule by dismissing the plaintiff's claim.35 Therefore, under the abstention doctrine in Shlensky, the function of the business judgment rule is to prevent courts from adjudicating on whether the defendant directors had breached their duties of care in the first place.36

11 More recent decisions which embrace this abstention doctrine include Kamin v American Express Co37 (“Kamin”). In Kamin, even though the board of directors had made an ostensibly wrong decision of declaring dividends of shares it owned instead of selling them, the court dismissed the claim of the plaintiff shareholders,38 stating that:39

The directors' room rather than the courtroom is the...

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