Brehm v Eisner - Assignment Example

Section 102(b)(7) of this legislation, allows a company, to include conditions in its article of association, which ensure that its directors cannot be made financially liable for a breach of their duty of care, provided they had not acted in bad faith. Similarly, section 145 of this legislation, permits the indemnification of a director by a corporation, only if the director had acted in good faith. The Supreme Court based its decision on the business judgment rule and concluded that the Directors had acted in good faith.

The business judgment rule originated in Otis & Co. v. Pennsylvania R. Co. In this case, the court held that "mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for NEGLIGENCE in the discharge of their appointed duties." The decision taken by the old board was deemed to have been made, on the basis of its fiduciary care to the stockholders and the corporation. The business judgment rule accords protection if a board acts in good faith and on an informed basis that its actions would promote the best interests of the corporation.

A judgment made in the course of business is held to be informed, if it can be established that the directors had apprised themselves of all the relevant facts, prior to arriving at their decision. Consequently, the due care expected of the board, with regard to the shareholders and the corporation, is most important. In this case, the plaintiffs failed to establish that the directors had acted in a fraudulent or negligent manner. As such, the Supreme Court affirmed the Court of Chancery’s decision and held that the directors had acted in good faith.

Therefore, the business judgment principle would come to their rescue. The Supreme Court of the Delaware State ruled that the directors’ decision would hold good in this case, as they had not acted with the vested interest or in ignorance of the facts.