Most corporate directors and their attorneys are well-acquainted with the Business Judgment Rule. Put simply, it is a presumption that a corporate director made a decision in good faith and with the best interests of the corporation in mind. Courts recognize the complexities of business and are loathe to second guess the decisions of directors, who are in a far better position to make those decisions.
The Business Judgment Rule does not function as a blanket immunity doctrine, however. If there is evidence that a director was not acting in good faith or with the best interests of the corporation in mind, the decision may be scrutinized by a court. Likewise, if the director has an interest in the transaction that is potentially at odds with the interests of the corporation, the transaction is also subject to scrutiny. Once the Business Judgment presumption is overcome, the burden will fall squarely on the director to prove that the transaction was fair to the corporation.
In Nebraska, a director is not liable for any action taken as a director, or any failure to take any action, if he or she performed the duties of his or her office in compliance with the business judgment rule. Neb.Rev.Stat. § 21-2095(4). Once a plaintiff has produced evidence that a director breached some fiduciary duty, the burden shifts to the defendant director to prove that he acted in accordance with the requirements of the business judgment rule. Sadler v. Jorad, 680 NW.2d 165, 171 (Neb. 2004). To invoke the protection of the business judgment rule, a defendant director has the burden to prove that his actions were taken in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner he reasonably believes to be in the best interests of the corporation. Neb.Rev.Stat. § 21-2095(1).
The application of the Business Judgment Rule is further discussed in the case ofTrieweiler v. Sears, 268 Neb. 952, 689 N.W.2d 807 (2004). In Trieweiler, the Nebraska Supreme Court held that “the burden of proof is on the party holding a confidential or fiduciary relation to establish the fairness, adequacy, and equity of a transaction with the party with whom he or she holds such relation.” The relevant statutory provisions can be located at Neb. Rev. Stat. § 21-20, 113 et seq. The defendant director must prove that the transactions were approved by 1) disinterested directors after full disclosure, 2) disinterested shareholders after full disclosure; or 3) the “transaction, judged according to the circumstances at the time of the commitment, is established to be fair to the corporation.” For interested director transactions, where a defendant director has an interest in the transaction that may be adverse to the corporation’s interest, the defendant director must prove that one of these three conditions has been met. See Trieweiler, supra.
As a practical matter then, corporate directors should strive to avoid interested director transactions. Their fiduciary duties to the corporation should be first and foremost on their minds, with the interests of the corporation placed ahead of their self-interest. If an interested director transaction is unavoidable, it should be made on the fairest of terms to the corporation and approved in advance by disinterested directors and/or shareholders of the corporation after full disclosure. If the transaction has already occurred, attempts should be made to have the transaction ratified by disinterested directors or shareholders. In any event, corporate directors should be prepared to have any interested director transaction challenged by the corporation’s shareholders. Toward that end, they should maintain all corporate records related to the transaction and be prepared to prove that the corporation was treated fairly.