Earlier this week, I wrote about an amicus curiae brief submitted by 19 law school professors Friedrichs v. Cal. Teachers Ass’n, a case now pending before the United States Supreme Court. In particular, I questioned whether these academics properly described the holding Finley v. Superior Court, 80 Cal. App. 4th 1152 (2000). The professors claimed that the case represented a “rare example” of a court holding that the business judgment rule is a defense to an attack on a corporate contribution. In fact, the reported holding in the case was that the business judgment rule was a defense to the decision of a special litigation committee.
The 19 law professors also incorrectly described the holding in another California case, Barnes v. State Farm Mut. Auto. Ins. Co., 16 Cal. App. 4th 365 (1993) (“claim by policyholder of mutual insurance company seeking to stop insurer from engaging in political activities dismissed because the decision was protected by the business judgment rule . . .”). Although the Court of Appeal did invoke the business judgment rule in Barnes, it did so in the context of the policyholder’s separate claim that the company was maintaining too large a surplus. The policyholder’s challenge to political expenditures was made on constitutional grounds and the Court of Appeal’s analysis of that claim did not involve the business judgment rule.
Even though the law professors erroneously cited Finley and Barnes, I do believe that courts should, and do, apply the business judgment rule to director decisions to make political and other contributions. In fact, the professors overlooked one California case in which the court expressly deferred to the business judgment of the directors. Marsili v. Pacific Gas & Elec. Co., 51 Cal. App. 3d 313 (1975) was a derivative suit challenging the propriety of a political contribution. Here’s what the Court of Appeal had to say:
Neither the court nor minority shareholders can substitute their judgment for that of the corporation “where its board has acted in good faith and used its best business judgment in behalf of the corporation.”
Quoting Olson v. Basin Oil Co., (1955) 136 Cal.App.2d 543, 559-560 (1955).
