Business Judgment Rule and Director

Posted on 10 March 2019

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The ‘Business Judgement Rule’ (BJR), was first discussed and recommended by our Securities Commission (SC), in its Finance Committee Report of Corporate Governance 1999 (RGC).

Then, it was incorporated into company law, through the amendment brought the Companies (Amendment) Act 2007. It then became the subsection, section 132(1B) of Companies Act 1965, and subsequently migrated to Companies Act 2016 (CA 2016) and became section 241(1).

The BJR was originated from United States. It was a proposal made by the American Law Institute. (American Law Institute Principles of Corporate Governance and Structure, Pt IV, para 4.01(a)). Then Australia adopted the BJR and becomes part of its company law through amendment brought in section 180(2) of the Corporate Law Economic Reform Program Act 1999. In RGC, the SC was referring to the Australian model.

There are four elements in the BJR:

  1. The director must makes the business judgment in good faith for a proper purpose. (s 214(1)(a) CA 2016)
  2. The director does not have a material personal interest in the subject matter of the business judgment. (s 214(1)(b))
  3. The director is reasonably informed of the subject matter of the business judgement. (s 214(1)(c))
  4. The director reasonably believes the business judgement is in the best interests of the company. (s 214(1)(d))

The BJR serves as a means of protection, or as safe harbour, for the director in making business judgments, especially when the business judgement is important and risk driven. The BJR will then examine whether the director has negate his or her fiduciary duties in common law or equity when making a business judgments, which include of not to taking an action of decision. (s 214(2) CA 2016).

The rationale behind the BJR, is to protect the director who discharges his or her duties diligently and honestly. The BJR also promote the responsible risk taking, while there is mechanism of check on their powers.

Note: This article also published at LinkedIn.