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Directors' Duty of Care & the Business Judgment Rule: American Precedents & Australian Choices Deborah A. DeMott Vol. 4, No. 2 Bond Law Review |
ABSTRACT:
The development of United States law in defining the duties of care and circumstances in which directors will be held personally liable for a breach of duty is discussed in this article with reference to the current state of such laws in Australia. Of the three separate duties owed by the directors - the duty to act lawfully, the duty to act loyally, and the duty to act carefully - Professor DeMott takes up the duty of care and analyzes case law on the duty in the US: Francis v. United Jersey Bank as it explores the duty to use care in making decisions, Smith v. Van Gorkom as it holds directors liable for decisions made without adequate information, Shlensky v. Wrigley as it relates to the broad reach of the business judgment rule and the new dimensions that were added to that doctrine under Paramount Communications v. Time, Inc. (takeovers) and Credit Lyonnaise Bank Nederland v. Pathe Communications Co. (duties owed to creditors in the vicinity of insolvency). After establishing the US law, Professor DeMott discusses the policy rationales and the consequences of the law as it has developed in the US. She then takes on current Australian law, pointing out the subtle differences in the law of that country that are at odds with the business judgment rule as it is constituted in the United States: the requirement under corporations law that directors be personally liable for debts incurred in insolvency, oppression statutes that give parties grounds for suit against decisions made by the corporate management other than derivative litigation and the ability of the court to look beyond the question of good faith to establish fairness, as well as the differences between the types of corporations that dominate the marketplace in the two countries. The article concludes by pointing out that this analysis illustrates the difficulty of importing norms into a foreign system with a complex body of corporate law shaped by different policy choices.
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