LOL. Bite your tongue, they don't need the encouragement!

Those darned wage earners just keep getting in the way of the wealthy. I guess those lobbyists will still have to take the ethics classes proscribed for them in the ridiculous lobby reform bill. Lobbyists were confident they could repeal the provision that narrowed the tax break. I'll just bet they were.

I have little knowledge of corporate law but I wonder if a CEO's head might roll. Your point about net loss is well taken, great post.

You know how it is, everybody wants their money.

The lawsuit is a loser. There is something called the Business Judgment Rule. It allows management to get away with anything, as long as its not patently fraudulent or incredibly boneheaded. Allowing employees to do investigative journalism is neither.

From Wikipedia:

In effect, the business judgment rule creates a strong presumption in favor of the Board of Directors of a corporation, freeing its members from possible liability for decisions that result in harm to the corporation. In short, it exists so that a Board will not suffer legal action simply from a bad decision. As the Delaware Supreme Court has said, a court "will not substitute its own notions of what is or is not sound business judgment" (Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)) if "the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company."(Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971))

The rationale for the rule is the recognition by courts that, in the inherently risky environment of business, Boards of Directors need to be free to take risks without a constant fear of lawsuits affecting their judgment.

The presumption raised by the Business Judgment Rule may be rebutted by the plaintiff. Typically, defensive actions that are: based on threats that are unreasonably perceived, unproportional to the perceived threat, or "cram a management alternative down shareholder's throats will successfully defeat presumption of the business judgment rule.

From Professor Bainbridge:

The modern conception of the business judgment rule as a standard of liability is largely the handiwork of Delaware supreme court justices Henry Horsey and Randy Holland. Before they began their work, the business judgment rule generally was seen as a barrier to judicial review of the substantive merits of board decisions. As one old case put it:"the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors." Or, as another case vividly explained: "The directors' room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact of on profits, market prices, competitive situations, or tax advantages."

In contrast, Horsey and Holland pulled the teeth from the business judgment rule. They described the rule as merely being intended "to preclude a court from imposing itself unreasonably on the business and affairs of a corporation." Worse yet, they put the cart before the horse by holding that: "To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty-good faith, loyalty or due care."

So maybe Jonathan has a point if the shareholders can prove that the directors breached one of the triads which would seem to be the case if the directors were responsible for not providing due care.

it's pretty obvious that someone took 'Network' a little too seriously. it's a pity they got Rather fired, he would have been the perfect Howard Beale(after Peter Finch of course)

Chico's, first it was not that I did not believe you I was just curious about how it could be that a board directors are seemingly above the law which reminded me how tort reform is protecting corporations more and more from what might be legitimate law suits by ordinary citizens but of course that is a whole other topic.

But when I read the quotes I posted it made me wonder if stock holders could indeed sue a board of directors. Since I am no lawyer much of this has me scratching my head and your point about normal English is well taken.

What I find confusing, and this is no doubt due to my own ignorance of law, is that Bainbridge seems to be saying that the Business Judgment is being interpreted two different ways as stated in this quote from the link you took the time to so kindly provide,

"Two conceptions of the business judgment rule compete in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions. This view is increasingly widely accepted, especially by some members of the Delaware supreme court. The other conception treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions. The distinction between these conceptions matters a great deal. Under the former, for example, it is far more likely that claims against the board of directors will survive through the summary judgment phase of litigation, which at the very least raises the settlement value of shareholder litigation and even can have outcome-determinative effects."

Bainbridge seems to be saying that the rule is being more widely accepted by some members of the Supreme Court that they will consider reviewing the merits of board decisions while another presently accepted interpretation is that the courts simply will not review board decisions.

What is your take on this?

By the way I think we must be neighbors, I live in Magalia just outside of Chico.

I agree with what Professor Bainbridge says farther down in the post. Namely, when courts say that Board did not exercise "due care," they mean the Board used a very flawed decision making process (i.e. procedural due care) or that the Board members acted in their bests interests only and against the interests of the corporation (i.e. bad faith / duty of loyalty). Courts won't let shareholders win a suit just because a decision was a bad idea.

Another way of putting it is that if the Board truly thought about the issue before making its decision and if the Board members did not take corporate assets for themselves, the shareholders will lose their suit -- even if the decision was dumb.

To make it a little less abstract, I'll apply it to Jonathan's hypothetical suit over allowing investigative journalism.

Disney owns ABC. ABC tries to earn money by selling news. If you are trying to sell news, it's a no-brainer that producing investigative journalism might help you make money. Because it's a straight-forward decision, a court is not going to require the Board to go through a lot of procedure to justify it. I don't know exactly how much effort Disney's Board put into that decision, but I'm sure a court is going to find whatever they did was adequate. So there is no procedural due care problem.

Now on to bad faith. When you look for bad faith, you're looking for something like a Board member selling his brother-in-law millions of dollars of corporate shares for $1. Again, I don' know exactly why the Diseny Board decided to allow investigative journalism, but I seriously doubt the Board did it to help out the CEO's loser nephew. The sareholders lose here too.

As Professor Bainbridge points out, there are some judges that are more aggressive at looking at the substance of a Board's decision than this. But these judges will not invalidate decisions that are merely bad,they must be really, really, obviously dumb decisions.

So to put it in perspective, the mainstream corporate law position is that courts can't overturn a decision merely because it is obviously dumb and that people who think the courts should do so are radical liberals. Jonathan's lawsuit wouldn't even get by the radical liberals.

***

I live in Arizona. In the original Bad News Bears, Chico's Bail Bonds was the team's sponsor. Back in high school, my friend insisted we name our band Chico's Bail Bonds, which was immediately and abrasively shot down. In my friend's honor, I adopted it years later as my screen name.

Chico’s,

Thanks for taking time to reply and translate the lawyer lingo into English.

It would seem that the interpretation of law has much to do with who the judges are which has always been my impression of our court system but I do understand what you are saying that the decisions by the board would have to be stupid in the extreme.

Having said that Eisner sounds like a real jack-ass from what Bainbridge concludes at the end of his column,

"The facts suggest that Eisner hired his buddy Ovitz, fell out with Ovitz and wanted him gone, cut very lucrative deals for his friend Ovitz both on the way in and on the way out, all the while railroading the deals past a complacent and compliant board. The story that emerges is one of cronyism and backroom deals in which preservation of face was put ahead of the corporation's best interests. As such, the case does not necessarily presage the emergence of what Allen called "'"objective' evaluation of the decision" made by a board. Instead, this looks like another case in which "we have reason to disbelieve the protestations of good faith by directors who reach 'irrational' conclusions?" Michael P. Dooley, Fundamentals of Corporation Law 263 (1995). Once again, a seeming inquiry into the rationality of the decision arguably masks an underlying search for conflicted interests and self-dealing."

So if there is a conflict of interest as in Eisner clearly costing Disney money with his lucrative deals with Ovitz by "railroading" deals past a "compliant" board don't you think the major shareholders, the actual owner's of the corporation, would have a right to do something about Eisner's incompetence? I realize this is a different topic than a hypothetical suing because Disney allowed one of its news outlets to report damaging information about Disney but still I am curious as to how you feel about this.

Sorry about the confusion over your moniker, there is actually a Chico's Bail Bonds in my area. Not that I have ever been in the position to have needed their services, I found it with a google search.

By the way I am a musician as well I play the saxophone and flute, jazz mostly.