Explaining and Analyzing the Business Judgment ‎Rule in the Company Law with Comparing Its ‎Rationales to the Iranian Law

Document Type : Research Paper

Author

Assistant Professor of Law, The Institute for Management and Planning ‎Studies (IMPS) Tehran, Iran

Abstract

 
The directors of the company, including the members of the board of directors and the CEO, are responsible for the management of the company. They have to make day-to-day decisions about managing the affairs and property of the company. From a legal point of view, directors are subject to the duty for the company to take the best decisions and actions in terms of maintaining the interests and expediency of the company, but in some cases, due to a mistake in understanding the reality or a mistake in understanding the fair decision, an action or decision may be taken which later turns out to be wrong and causing damage to the company. In this assumption, it is a legal issue that how the mistakes of the directors in managing the company's affairs can be described from the legal point of view, and whether they have a liability to compensate the company or not. In the company law of many legal systems, the analysis of this issue is mainly influenced by a legal theory entitled "business judgment rule of directors". According to this theory, in cases where the decision and harmful action to the company is not caused by the violation of the directors' obligations, including fiduciary obligation, prohibition of the conflict of interests, obligation to care and compassion and other obligations, the harmful mistake of the director does not mean his liability to compensate for the damage. This rule is explicitly or implicitly accepted in the laws of many countries. The explanation and analysis of the implementation of this rule in Iranian law can be proposed, especially because in Iranian law, according to the rules of civil liability, anyone who causes damage to another is obliged to compensate for the
damage. It is possible to justify this rule based on legal grounds in the field of civil liability, trust law and company law. In this research, an attempt has been made to prove that this rule is applicable and identifiable in Iranian law based on general legal principles and rules in civil liability law and trust law and special rules in commerce law and facts related to the director's position in the company. From the point of view of company law, the exclusive, independent, absolute and general attributes of the board of directors and the recognition of the discretionary competence of directors in making decisions about the affairs of the company increase the possibility of making mistakes in making decisions, and it is clear that making mistakes in making decisions is not only inevitable but is one of the necessities for exercising the authority of the board of directors. The possibility of suing for damages against director or the intervention of a judge to check the fairness or unfairness of the director's decisions, simply claiming that the decision is wrong and harmful and incompatible with the absolute and independent authority of the board of directors and their discretionary competence. Also, in terms of practical reality, company law has accepted the fact that management practiced by directors are in a changing business environment with the risk of making mistakes in decisions, and creating a safe territory for directors in directorial decision-making and risk-taking situations and profitability and commercial activity which is expected by shareholders is possible by identifying the rule of business judgment of directors and immunity of directors from liability for professional decisions and prohibition of inspection of the fairness or unfairness of the decision by the judicial authority. From the point of view of civil liability law, the rule of business judgment is justifiable. In fact, the fault is of the pre-conditions of liability to compensation and in the case of company directors, a mistake or unfair decision in itself is not associated with fault. In addition, in all fiduciary relationships, of which the relationship between the director and the company is one example, according to the rule of trust, the liability of the trustee (director) requires the fault. In the same way, company management, as a professional job, in terms of legal describing of the decision and the degree of fault required for professional liability, requires more than mere mistakes. Considering the business conditions of the company's environment and the necessity of active management and decision-making, the duty to care does not mean the duty not to make mistakes. The duty of efficient management means applying skill and specialized care in management practices. The legal rule considers the provisions of such a duty to be an obligation to apply these skills and tasks and does not impose a guarantee on the director for the usefulness and real fairness of the decision and the absence of mistakes and this is the legal, logical and moral spirit of the business judgment rule.
 
 

Keywords

References

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Law Quarterly
Volume 52, Issue 3
November 2022
Pages 539-558

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