The Business Judgement Rule as a procedural shield for directors and company officers
The Business Judgment Rule (BJR) constitutes one of the fundamental pillars in delineating the liability of company directors. It recognises business discretion as an inherent component of corporate management and governance, while simultaneously establishing a framework of protection against potential claims arising from business decisions that ultimately prove unsuccessful.
It is important to highlight that this rule applies to strategic and business decisions, in respect of which directors exercise a discretionary judgment, excluding those regarded as non-discretionary decisions — that is, those determined by law, the articles of association, or resolutions adopted by the general meeting. Within the Spanish context, the Spanish Companies Act, particularly Article 226, incorporates the essential principles of this doctrine, adapting them to the national legal system.
What is business discretion?
Business discretion refers to the scope of action available to a businessperson or director when making strategic or management decisions, always within the limits of the diligence required of an “orderly entrepreneur”. This standard is deemed satisfied when the director acts in good faith, without personal interest, on the basis of sufficient information, and following an appropriate decision-making procedure.
When is the Business Judgment Rule applicable?
However, the protection afforded by the Business Judgment Rule does not extend to decisions involving conflicts of interest or those directly affecting other directors or related parties, since in such cases the duties of loyalty and independence prevail.
The Business Judgment Rule applies to strategic or business decisions, whether of action or omission, adopted by individual directors or by collegiate management bodies. For the rule to operate, several essential requirements must be met:
• Sufficient information: the director must have gathered and analysed the relevant data that he or she reasonably considered appropriate for decision-making.
• Proper decision-making procedure: there must be a deliberative process in which alternatives, risks, and consequences are duly assessed.
• Good faith conduct: it is not enough for the director to be personally convinced of acting correctly; there must be objective evidence that the action was taken in the company’s best interests.
• Absence of personal interest: independence of judgment and the absence of conflicts that might compromise impartiality are required.
These elements delineate the boundary between the duty of care and the duty of loyalty, ensuring that business decisions do not become a sphere of impunity.
The practical application of the Business Judgment Rule presents certain challenges, particularly in the context of small and medium-sized enterprises, where corporate governance structures are less complex and decisions are often made more informally. In such cases, some of the rule’s requirements may prove inapplicable or lack practical relevance.
The Business Judgment Rule in insolvency proceedings
Its compatibility with insolvency proceedings has also been the subject of debate. Some judges maintain that the rule is ineffective in proceedings other than those governed by the Spanish Companies Act, and that it cannot be invoked as a defence against the classification of insolvency due to breaches of statutory duties. It could only be alleged where the cause of culpability arises directly from reasonable business decisions.
Similarly, the rule does not protect the insolvency practitioner, whose standard of diligence is distinct and determined by the specific supervisory or substitutive functions inherent in that role.
Evolution of the Business Judgment Rule in Spain
In recent years, the Business Judgment Rule has been a matter of considerable controversy in Spain. Judicial interpretation has evolved from an initial period of practical impunity for directors towards a trend of greater rigour and judicial scrutiny over their decisions.
This shift in the “pendulum of liability” reflects the pursuit of a balance between business autonomy and accountability. The Business Judgment Rule, as currently conceived, remains a valuable instrument for safeguarding entrepreneurial initiative against the inherent risks of decision-making, but its effectiveness depends on prudent and coherent interpretation by the courts.
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