On the subject of corporate boards exercising “reasonable care” when selecting an expert, Professor Stephen Bainbridge has recently raised some thought-provoking points. One point of intrigue is whether or not the business judgment rule applies to a board’s choice of expert consultants. This rule typically supports directors in their decisions, provided those decisions are made in the best interests of the corporation, are informed and are not in breach of their duties.
The professor’s queries potentially touch upon section 141(e) of the Delaware General Corporation Law, a regulation which safeguards directors who rely “in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation’s officers or employees, or committees of the board of directors, or by any other person.”
How does this pertain to corporations in California though? California Corporations Code section 309, akin to Delaware’s 141(e), shields directors when relying on certain information provided by various parties such as the board’s committees, officers or other established experts.
However, the difference lies in Subdivision (a), where directors must perform their duties “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily careful person in a like position would use under similar circumstances.” This seemingly emphasizes the necessity of “reasonable care” more strongly compared to its Delaware counterpart.
Implications of these minute but significant differences should not be understated, particularly when selecting experts. Could this additional stipulation lead to a heightened degree of legal vulnerability for Californian directors? This indeed may be the case and warrants serious consideration for executives and legal professionals operating in such jurisdictions.
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