Can Officers Contract For The Business Judgment Rule?

Yesterday, I wrote about a recent memorandum opinion by U.S. District Court Judge Dale S. Fischer that led to a jury verdict awarding nearly $169 million in damages against three former corporate officers. Among other things, Judge Fischer ruled that the business judgment rule is not available to corporate officers under California law.

Nearly four years ago, the Delaware Supreme Court held that “the fiduciary duties of officers are the same as those of directors”. Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009). In my view, this is a questionable conclusion and one that is unlikely to be correct in California. California prescribes the standard of care for directors by statute, Corporations Code Section 309. Neither Section 309 nor any other provision of the General Corporation Law prescribes the fiduciary duties of officers. One reason is that officers, unlike directors, are agents and often employees of the corporation. See Worlds In Collision – Agency Law And A Director’s Fiduciary Duties. This means that the statutory law governing officers is not found in the Corporations Code but in the Civil Code (Title 9) and the Labor Code.

Statutory law, however, is not the exclusive source of rules governing the relationships between corporations and their officers. Often, corporations will enter into employment and other contracts with their officers. This raises the interesting question of whether a corporation might agree that in any dispute involving an alleged breach of fiduciary duty, the officer will have the benefit of the business judgment rule. I don’t know whether this has been tested in the courts, but it may provide an approach if the California courts ultimately determine that the business judgment rule is not available to officers as a matter of common law.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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