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The concept of business judgment

Published online by Cambridge University Press:  11 December 2018

Andrew Keay  and
Joan Loughrey
Andrew Keay
Affiliation:
Centre for Business Law and Practice, School of Law, University of Leeds, Leeds, UK
Joan Loughrey*
Affiliation:
Centre for Business Law and Practice, School of Law, University of Leeds, Leeds, UK
*
*Corresponding author. Email: j.m.loughrey@leeds.ac.uk
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Abstract

Categorising something as a business judgment can provide directors with a powerful shield from accountability. It has been said that the courts in England and Wales defer to directors’ business judgments and directors’ decisions are protected from review in other jurisdictions by a business judgment rule. Yet what a business judgment is has never been addressed, and so precisely what is being protected, and why, is unclear. This paper analyses case law in England and Wales and key Australian and US cases to answer this question. It argues that the courts use the term judgment in two senses: an ability, and a decision sense, and that business judgment in both senses can be linked to Knight's concept of entrepreneurial judgment, and directors’ wealth creation function. Conversely, decisions that are linked to directors’ corporate governance function and are less easy to categorise as entrepreneurial are less likely to be viewed as business judgments.

Keywords

business judgmentdirectors' dutiesentrepreneur
Type
Research Article
Information
Legal Studies , Volume 39 , Issue 1 , March 2019 , pp. 36 - 55
Copyright
Copyright © The Society of Legal Scholars 2018 

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Footnotes

†

This paper is part of an AHRC funded project on Business Judgment and the Courts (Project Number: AH/N008863/1), and we are grateful to the funders. We would like to thank Dr Daniel Attenborough, Professor Terry McNulty and the anonymous referees for their very helpful comments, and Dr Francis Okanigbuan for his research assistance. Earlier versions of this paper have been presented at the SLSA and the SLS annual conference in 2017, when it was short-listed for the Best Paper Prize, and also at public lectures at Adelaide, Melbourne and ANU and we are grateful for the constructive feedback received.

References

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141 Ibid.

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149 [2010] UKSC 51 at [91].

150 Report of the Committee on the Financial Aspects of Corporate Governance (1992) para 2.5.

151 O'Kelley (2006), above n 122, at 770.

152 On shadow directors see above n 148.

153 Re Sports Management Group Ltd (In Liquidation) [2016] BPIR 1224 at [113].

154 Review of the Role and Effectiveness of Non-executive Directors (January 2003) para 1.12.

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158 Knight, above n 122, p 292.

159 As recognised in Re Spectrum Plus Ltd [2005] 2 BCLC 269 at [95] (Lord Hope).

160 Knight, above n 122, p 298.

161 Ibid, p 291 and also p 297.

162 Ibid, p 291.

163 Ibid, pp 295–296.

164 Schumpeter, above n 121, p 20.

165 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 427.

166 [2011] FCA 717 at [16].

167 Cf McNulty and Pettigrew, above n 61.

168 Eisenberg (1997), above n 156, at 245–247.

169 BP Oil Disaster, see http://www.bbc.co.uk/news/special_reports/oil_disaster (last accessed 4 November 2018).

170 FRC Boards and Risk (2011) p 4; FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (September 2014) pp 2–3.

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172 Grimes v Donald 20 Del J Corp L 757 at 771 (Del Ch Jan 11 1995); ASIC v Fortescue Australian Securities Metals Group Ltd [2011] FCAFC 19, (2011) 81 ACSR 563.

173 Bainbridge, above, n 93, at 981 links these to monitoring (though see caveats at 984) but would argue that they should be protected by the BJR.