The Limits of the Business Judgment Rule

Geoffrey Mazel, Partner, Hankin & Mazel

Boards sometimes think the business judgment rule is a safety bubble and that anything they say and do is protected. But there are nuances they need to understand. 

Case in point. We had a case where a shareholder died and the family wanted the stock to be transferred to another family member. Many proprietary leases provide that in the event of a death the board is obligated to assign and transfer the stock and the proprietary lease to a financially responsible member of the decedent’s family. The people who applied for the shares were financially qualified and responsible. However, there were some issues regarding who was going to live in the apartment, and the board denied the family’s request. The family sued.

Not to the rescue. The court said that this was a question of contract interpretation and reasonableness, not an issue of business judgment. It ordered the board to transfer the shares. There is a dissenting opinion that does say the business judgment rule did apply. So it’s not black and white. The case law is always evolving.

The bottom line. There is a broad protection if you act within your authority and in good faith. If you decide to repair all the board members’ apartments and nobody else’s, that’s obviously self-dealing, and you won’t be protected. If you want to renovate a lobby and a shareholder says it doesn’t need to be renovated, that decision will be protected. But the business judgment rule isn’t bulletproof. Whenever you make a decision that straddles any kind of line, you always have to consult with counsel.