Analysis Of Business Judgment Rule

China conducted a fundamental revision of its Corporate Law in 2005. in the field of duties and liabilities of director, the most obvious change is that director’s duty of care is embedded into the new Corporate Law, and this is definitely a great progress. However, new provisions have also brought up new confusions. The provision about director’s duty of care and the liability when the duty is broken in148 and 150 clauses of the new Corporate Law are too abstract and infeasible, so that those clause are totally out of use in the legal practice of courts, and the Supreme Court of China has not yet worked out a statement to explain what director’s duty of care truly is and how to make director liable. These situations cause widespread discussion in theoretical and practical circuses. At the meantime, along with the fast and continuous develop of the economy of China, the size of Chinese corporations is also growing quickly, and the powers of directors of these corporations are growing too because they control the management of those corporations. Powers are abused when they are out of control. That’s the reason why it is not a big surprise that company scandals keep popping up in big amount when the standard of behavior and the standard of review are all vague in the statute. So given that our corporate law has deficiencies and the real need coming from the economy life of this country, figuring out how to reasonably look for liabilities of directors when they break their duties of care is a very serious problem.To solve this problem, researches carried out before in China have focused on how to clarify the definition of director’s duty of care, and that greatly narrows the perspective of those researches, and make the problem more difficult to solve. Actually, the problem of how to reasonably look for director’s liability when their duties of care are broken is a very synthesis one. It has to be put in the context of corporate governance to find a way. Duty of care, standard of imposing liability and methods of imposing liability should be thought as a whole group. Only by this, people can find a balance between the interests of directors and shareholders, and the balance of interests must comply with the expectation of the country in which the problem of imposing liabilities on directors is to be solved. The business judgment rule in US corporate law can give us some insights about it.Business judgment rule comes from the American case law. The rule is designed by the court to solve the problem of whether liabilities should be posed on directors for the damaged to the company caused by their business decisions. The rule provides that directors and managers, when making business decisions in good faith, should be considered to obey the duty of care if they, (1) has no conflicts of interests with the objective of the business judgment, and (2) has collected reasonable amount of information before they make the business judgment, and (3) rationally believe that the business judgment is in the best interest of the company. If shareholders want to put directors liable for the business judgment they made in the claim that the directors have broken their duties of care, they must at first prove that the directors have not fulfilled those three conditions. About the second condition, American courts use a gross negligence standard to decide whether directors have collected enough information before the business decision is made. If shareholders can not prove that the directors have not fulfilled the three conditions, the court will not review the substantial contend of the business judgment, and will award directors business judgment with full deference. In America, corporate law is under the authority of states jurisdiction, and almost every jurisdiction provides director’s duty of care in its Corporation Law, and the standard of behavior is normal negligence in almost all these states. The business judgment rule changes the standard of review of director’s liability when duty of care is broken to gross negligence. Plus, the rule on some level protects the company from shareholders’ derivative suits, and save the judicial resources. All these imply the deference given by American corporation law to director’s business judgment. Director’s duty of care, shareholder derivative suits and business judgment rule, these three elements together compose the system of directors managerial liabilities, and the function of this system is to maintain the authority of directors in the company while reasonably prevent their abusing the power in their hand. This shows the value system of American corporation law, and that is efficiency comes first.Director’s managerial liability is the liability imposed on directors when they break their duties of care in the process of carrying out their responsibility of making informed business judgment. A very important goal of corporate governance is pursuing the balance of interests between the owners of the corporation, in other word shareholder, and the managers of the corporation, in other word directors. Different countries see the balance of interests from different perspectives because they have different social, economical, legal and cultural backgrounds, based on which they design different kinds of systems in the process of pursuing the balance of interests. These differences are mainly exampled by the different design of director’s rights, duties, powers, and liabilities, in which the different in liability system is the key point. And in the liability system, managerial liability controls the core place.In the process of building our own system of director’s managerial liability, the corporation law of China should try to absorb the value system of American corporation law, which means put the efficiency upon fairness. Chinese law should input the business judgment rule, and make it effect along with director’s duty of care and shareholders derivative suits. As to the method of inputting the business judgment, judicial explanation of the Supreme Court of P.R.C. is the best choice. It can both clarify the contend of business judgment by clauses, prevent the confusion in the judicial practice which can probably come out because of the deficiencies in the our judicial system and the quality of our judges as a whole, and comply with the case law characteristics of business judgment rule, which means it is still developing, and when new situation comes, we can revise the judicial explanation as soon as it has to be.