posted by Kim on .
As company ombudsman, your task is to investigate complaints of wrongdoing on the part of corporate directors and officers, decide whether there is a violation of the law, and deal with the wrongdoers accordingly, Jane, a shareholder of Goodly Corporation, alleges that its directors decided to invest heavily in the firm's growth in negligent reliance on its officer's faulty financial reports. This caused Goodly to borrow to meet its obligations, resulting in a drop in its stock price. Are the directors liable? Why or Why Not?
The directors are not liable under the business judgment rule.
A regulation that helps to make sure a corporation’s board of directors is protected from misleading allegations about the way it conducts business. Unless it is apparent that the board of directors has blatantly violated some major rule of conduct, the courts will not review or question its decisions or dealings.
The reason for this rule is to acknowledge that the daily operation of a business can be innately risky and controversial. Therefore, the board of directors should be allowed to make decisions without fear of being prosecuted. The business judgment rule further assumes that it is unfair to expect those managing a company to make perfect decisions all the time. As long as the courts believe that the board of directors acted rationally in a particular situation, no further action will taken against them.
The board is allowed to reasonably rely on the representations of the corporate officers and is not required to do an independent investigation. There is nothing in the problem that indicates the board was involved in the faulty financial reports. As such only the officers would be personally liable.