INTRODUCTION
The business judgment rule has gained traction in US corporate law and jurisprudence. The rule recognizes that the directors of a company are the principal decision makers on corporate affairs, and courts are not suited to second-guess those decisions provided the directors exercise proper discretion.Footnote 1 Many other jurisdictions have codified and applied the rule in their corporate laws. This article examines the relevance of codifying and applying the US business judgment rule in the Nigerian corporate governance regime. The article is divided into six sections. The next section discusses the meaning and history of the business judgment rule. The article then examines why the rule was developed and applied in determining directors’ breach of duty of care and skill. The following section discusses the codification of the rule in US corporate law and investigates the various ways in which the rule has been applied by US courts. The article then discusses various reasons that inform the position of this article that codifying the rule in Nigeria and applying it to Nigerian corporate law are not necessary. It concludes with a suggestion that the continuous use of the extant statutory duty of care and skill in Nigerian corporate law is imperative in order to avoid undue diminution of the standard for assessing breach of the duty.
THE BUSINESS JUDGMENT RULE: MEANING AND A BRIEF GENESIS
It is axiomatic in corporate law that the shareholders are the owners of the company while the directors manage the company's affairs.Footnote 2 Indeed, from a pragmatic point of view, the actual power to steer the affairs of the company rests with the board of directors. In most cases, the stockholders only endorse the board's decisions.Footnote 3 However, the directors’ duty to manage the affairs of the company entails that the directors must be careful and skilful in executing their duties. Nevertheless, it is often claimed that directors are human beings and, as such, cannot be the ultimate paragons of circumspection. This view sits snugly on the corporate law doctrine called the “business judgment rule”.
The business judgment rule has become a dominant theme in corporate law discourse in both judicial and academic circles.Footnote 4 In large part, this is because the doctrine seeks to strike a proper balance between directors’ discretion and accountability in the management of the company's affairs.Footnote 5 The problem of directorial discretion and accountability has evolved in the corporate law debate because of the separation of the ownership and control of firms.Footnote 6 This separation hardly allows the interests of the directors and shareholders to converge, and often leads to a situation where directors either exercise their powers for their own interests as opposed to the interests of the shareholders or engage in acts that constitute moral hazards.Footnote 7 Put differently, the separation creates what corporate law mainstream scholars have termed “agency problems”Footnote 8 and makes it difficult for shareholders to monitor the manner in which the directors manage the company's affairs.
Although the business judgment rule remains a dominant theme in corporate law, a precise definition of the term has eluded scholars.Footnote 9 This does not mean that scholars have not made efforts to define the concept. It has been noted that the business judgment rule is “a doctrine holding that directors of corporations should not be liable for what amounts to a good faith exercise of business judgment, even if other boards might have reached a contrary decision”.Footnote 10 Also, scholars and judicial decisions have defined the rule as a rule of presumption. For instance, Nadelle opined that “under the business judgment rule, a board that has approved a specific action will be presumed to have acted in good faith on a fully informed basis, and in an honest belief that the action taken was in the best interest of the corporation”.Footnote 11 In Aronson v Lewis, the court noted that the rule “is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company”.Footnote 12 The various perspectives about the meaning of the term have prompted the view that the rule is “one of the least understood concepts in the entire corporate field”.Footnote 13 Notwithstanding the variegated definitions, one explanation is ingrained in the rule. Under the rule, courts will be unwilling to impose legal liabilities on directors who are sincere in making a business decision for the company that turns out to be injurious to the company. From another perspective, these definitions suggest that the rule enjoins courts to show deference to directors’ business decisions, provided that the decisions are not made in bad faith or tainted with fraud. In essence, directors’ independence in making business decisions for their corporation foregrounds the rule.
The business judgment rule originated in the US two centuries ago and has been consistently applied since.Footnote 14 In 1829, the Supreme Court of Louisiana noted in the famous case of Percy v Millaudon Footnote 15 that:
“The test of responsibility (of directors) therefore should be, not the certainty of wisdom in others, but the possession of ordinary knowledge; and by showing that the error of the agent is of so gross a kind that a man of common sense, and ordinary attention would not have fallen into it. The rule which fixes responsibility because men of unerring sagacity are supposed to exist, and would have been found by the principal, appears to us essentially erroneous.”Footnote 16
Essentially, the concept arose in the US “from the judicial concern that persons of reason, intellect, and integrity would not serve as directors if the law exacted from them a degree of prescience not possessed by people of ordinary knowledge”.Footnote 17
Since the Louisianan Supreme Court decision in Percy, the doctrine of the business judgment rule has become the fulcrum of protecting directors from liability in US corporate law. Indeed, the rule has become “long standing, deeply entrenched and comprehensively accepted by courts”.Footnote 18 For instance, the Wisconsin courtsFootnote 19 and courts in other states have religiously applied the doctrine.Footnote 20 Apart from the courts, the rule has been codified in US law through the American Law Institute (ALI) Corporate Governance Project.Footnote 21 More fundamentally, many countries have codified the ruleFootnote 22 or expressed their intention to do so,Footnote 23 with the US law and judicial approaches serving as the major templates for such codification. The next section discusses the role of the business judgment rule in corporate law.
THE BUSINESS JUDGMENT RULE: ITS BASIS IN CORPORATE LAW
Most proponents of the business judgment rule claim that the rule is important to corporate law because risks are involved in almost every business transaction.Footnote 24 Furthermore, transactions that yield maximum return on investment are those that have high degrees of risk.Footnote 25 Consequently, if directors are scared that their business decisions will be subjected to litigation and the attendant judicial scrutiny and personal liability, they will abstain from taking risks. Often, failure to take the risk would not only affect shareholders’ return on investment, it would also impede innovation in the firm that might be beneficial to the shareholders.Footnote 26 As one scholar notes, “because the potential profit often corresponds to the potential risk, it is very much in the interest of the shareholders that the law not create incentives for overly cautious corporate decisions”.Footnote 27 This justification for the business judgment rule is further strengthened with the argument that shareholders could hold many portfolio investments and diversify their risk. Thus, directors should be allowed to take high-risk business decisions because, even if they do so, the shareholders would only suffer a loss in respect of a proportion of their investment.Footnote 28
Apart from the issue that, without the business judgment rule, directors would be risk-averse, it is often argued that “judicial review is naturally ill-suited to analyse the quality of business decisions”.Footnote 29 Thus, courts lack the expertise to know and make good business decisions for corporations. Therefore, if courts are allowed to interfere or second-guess directors’ business decisions, there will a high chance that they will make mistakes in deciding the propriety or otherwise of directors’ business decisions.Footnote 30 More essentially, the courts might not be properly informed about the events or circumstances that informed the directors’ decision and the application of the courts’ hindsight could lead to a biased decisionFootnote 31 or action against directors.Footnote 32 In such circumstances, “courts cannot be punished for making a poor business decision, provided that it is legally sound”.Footnote 33 As with the justification of non-judicial interference, it has been noted that, even if directors make decisions that turn out be injurious to the corporation, the shareholders (not the courts) have the inherent power to sanction the directors through a vote to remove them at the company's general meeting.Footnote 34 Therefore, the courts’ intervention might amount to a waste of judicial time and resourcesFootnote 35 in a matter that could be dealt with internally.
Another element of the basis of the business judgment rule is that most company laws empower directors to manage the business of corporations.Footnote 36 Intrinsic in this power is the right of directors to exercise their discretion in making decisions for the corporation in certain circumstances.Footnote 37 If directors are not allowed to exercise their discretion, or where the exercise of their discretionary power is always subjected to judicial scrutiny, there is a risk that directors may, because of fear of personal liability, be scared to take decisions that would be beneficial to the corporation. More fundamentally, such judicial intervention will scare a critical mass of individuals who wish to take up directorship positions in corporations.Footnote 38 This, in turn, would negatively affect not only the quality of the individuals who manage the affairs of corporations and but also the quality of corporate decisions.Footnote 39 The next section discusses the codification of the rule and the various ways in which US courts have applied it.
CODIFICATION AND APPLICATION OF THE BUSINESS JUDGMENT RULE IN THE US
It has been noted that the business judgment rule is an “exclusively American legal construct that dates back to the early 19th century”Footnote 40 and is “almost adopted throughout the United States”.Footnote 41 It is applied in American corporate law as an exception to directors’ duty of care and skill,Footnote 42 which duty requires directors “to be diligent and prudent in the management of corporate affairs”.Footnote 43 In the context of statutory recognition, the business judgment rule has been codified under the ALI Corporate Governance Project.Footnote 44 Specifically, the ALI rule provides that:
“[A] director or officer who makes a business judgment in good faith fulfils the duty under this section if the director or officer: is not interested in the subject matter of the business judgment; is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and rationally believes that the business judgment is in the best interests of the corporation”.Footnote 45
Apart from the ALI rule, most US states have codified the rule in their corporate statutes.Footnote 46 For instance, in Nevada, “directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the best interests of the corporation”.Footnote 47 Also, the Californian Corporation Code exempts directors from liability for any action for which they exercise business judgment, if the action is done in a manner that the directors believe to be in the best interest of the company and its shareholders, and with such care and reasonable investigation as an ordinarily prudent person in the same position would use under the same circumstances.Footnote 48
The business judgment rule has also been applied and developed through judicial decisions in the US.Footnote 49 In Miller v American Telephone & Telegraph Co, the US Court of Appeals for the Third Circuit noted that the: “rule expresses the unanimous decision of American courts to eschew intervention in corporate decision-making if the judgment of officers is uninfluenced by personal considerations and is exercised in good faith … Underlying the rule is the assumption that reasonable diligence has been used in reaching the decision which the rule is invoked to justify”.Footnote 50
Consistency in the recognition and application of the business judgment rule in the US was further echoed by the court in In Re Caremark International Derivative Litigation,Footnote 51 where the Delaware Court of Chancery opined that: “[w]hether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through stupid to egregious or irrational provides no grounds for director liability, so long as the court determines that the process employed was either rational or employed in [sic] good faith effort to advance corporate interest”.Footnote 52
The statutory and case law recognition of the business judgment rule in the US noted above, show that the rule is embedded in the US corporate law and governance regime. The rule, however, has been applied in different forms in the US. In some jurisdictions, it is applied as a rule of presumption. For instance, in Delaware, the courts apply the rule as “a presumption that in making business decisions, the directors of a corporation acted on an informed basis, in good faith and in the belief that the action taken was in the best interest of the company”.Footnote 53 Apart from Delaware courts, the US Court of Appeals, Third Circuit noted in Johnson v Trueblood that: “[t]he business judgment rule validates certain situations that otherwise would involve conflict of interest for the ordinary fiduciary. The rule achieves this purpose by postulating that if actions are arguably taken for the benefit of the corporation, then the directors are presumed to have been exercising their sound business judgment rather than responding to any personal motivations”.Footnote 54
One critique of this “presumption approach” to the application of the business judgment rule is that it places a considerable burden of proof on a plaintiff to show that the directors have not fulfilled the conditions precedent that would entitle them to take the benefit of the rule.Footnote 55 Moreover, it creates judicial bias in favour of directors, in that the court presumes that the directors have acted properly and will only call upon the directors to show the entire fairness of the transaction when the plaintiff places some material facts before the court that defeat the presumption.Footnote 56
Under the ALI provision, the business judgment rule is applied under a different rubric: it operates as “a safe harbour”,Footnote 57 in the sense that the directors bear the onus of proving that the requirements of the rule apply to the transaction and, if they successfully discharge this burden of proof, they transition into an unassailable safe harbour.Footnote 58 The problem with this application of the rule is that it could create an opportunity and a fait accompli that would exculpate directors from liability for corporate decisions, irrespective of how awful those decisions turn out to be.Footnote 59 Another potential concern about the ALI version of the rule is that, apart from the good faith and non-interested requirements, which could be interpreted objectively, the requirements regarding the information the director had with respect to the subject matter of the decision and the belief that the decision is in the best interest of the company are interpreted subjectively. This is because the ALI provision emphasizes what the “director reasonably believes to be appropriate in the circumstances”Footnote 60 and whether he “rationally believes that the business judgment is in the best interests of the corporation”.Footnote 61 By implication, the shareholders would bear the brunt of bad decisions resulting from a director's personal and subjective judgment.
These approaches in the application of the business judgment rule have created several doctrines regarding the interpretation of the rule. Indeed, the rule is often either interpreted as an abstention doctrine,Footnote 62 immunity doctrineFootnote 63 or as a standard of review.Footnote 64 Under the abstention doctrine, “courts simply refuse to analyze board decisions in certain individual cases”.Footnote 65 In Shlensky v Wrigley, the Appellate Court of Illinois noted: “[t]he response which courts make to such applications is that it is not their function to resolve for corporations questions of policy and business management. The directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final”.Footnote 66
Similarly, the Supreme Court of New York asserted in Kamin v American Express Co that “the directors’ room rather than the courtroom is the appropriate forum for thrashing out purely business questions which will have an impact on profits, market prices, competitive situations or tax advantages”.Footnote 67 The challenge with the abstention doctrine, as noted by some critics, is that it creates “a presumption of non-review”.Footnote 68 With respect to the immunity doctrine, directors are encouraged to exercise absolute powers whenever they make a business decision and they will be immune from liability arising from the decision if a reasonable person in comparable circumstances would make the same decision.Footnote 69 As a standard of review, it requires the courts to minimise their review of directors’ business decisions.Footnote 70 Thus, under this limb, “the main function of the business judgment rule is to create a less demanding control standard than the ideal standard created by the definition of due diligence and prudence”.Footnote 71 The implication of the immunity and standard of review doctrines is almost the case of a distinction without any difference. This is because both doctrines require minimal judicial intervention and limited relief for the plaintiff once the directors meet the requirements for the application of the rule.Footnote 72
The business judgment rule has mostly been applied in the US in shareholder litigation against directors. With respect to minority shareholder litigation against directors, the rule has been applied to shield directors from liability both from a case law and statutory perspective. The seminal decision of the court in Auerbach v Bennett Footnote 73 is important here. The General Telephone and Electronics Corporation made controversial payments of over $11 million for a period of four years. The company set up an audit committee, which examined the company's accounts and wrote a report to the Securities and Exchange Commission.Footnote 74 Based on the committee's report, the plaintiff, who was also not satisfied with the management of the company's finances, instituted a derivative suit in which he claimed that current and past directors of the company knew about, and should explain, the dubious payments.Footnote 75 In line with the conventional practice in the US, the company established a shareholder litigation committee (SLC), consisting of three non-interested directors, to determine whether it was in the best interest of the company that the derivative suit should continue. The SLC recommended that the derivative suit would not be beneficial to the company.Footnote 76 The Court of Appeals of the State of New York accepted the SLC's recommendation and held that the committee's decision was a business judgment that did not warrant interference by the court unless the plaintiff could adduce evidence of fraud.Footnote 77 Similarly, in Abbey v Control Data Corporation,Footnote 78 the plaintiff, through a derivative action, alleged that the directors breached their fiduciary duties and federal securities rules. Subsequently, the company's board of directors set up an SLC, which recommended that the derivative action would not be beneficial to the company and also applied for a summary judgment.Footnote 79 The US Court of Appeal, Eighth Circuit ruled in favour of the company and noted that the SLC could legally discontinue a derivative action.Footnote 80 In the Indiana case of Cutshall v Barker,Footnote 81 the Indiana Court of Appeals foreclosed the possibility of second-guessing the decision of a law firm that acted for the corporation and the SLC, and upheld the law firm's decision to terminate the plaintiff's derivative suit on the ground that the law firm was disinterested in the transaction.Footnote 82 The court seems to have given the decision in accordance with the Indiana corporation law that clearly stipulates that any determination by an SLC as to whether or not it is in the company's interest that a party pursues his right to claim a remedy through a derivative suit shall be deemed to be conclusive.Footnote 83
Notwithstanding these decisions and statutory provisions, US courts have demonstrated a degree of inconsistency in applying the business judgment rule to derivative suits. Therefore, in the Delaware Supreme Court case of Zapata Corporation v Maldonado,Footnote 84 the court developed a two-prong test for applying the rule. With respect to the first prong, the court would investigate the good faith, independence and rationale for the SLC's conclusion.Footnote 85 At this stage, “limited recovery would be permitted on these issues and the corporation would have the burden of proof”.Footnote 86 Under the second prong, the court would utilize its own business nous to decide the propriety or otherwise of granting the motion to dismiss the suit.Footnote 87 The mischief the second prong was intended to cure was to avoid undue foreclosure of a valid derivative action of a member of the company, while at the same time determining the suit in a manner that would advance the company's interest as sought by the SLC.Footnote 88 It could be argued that the Zapata decision shows how US courts sit on the fence with respect to applying the business judgment rule. Indeed, case law shows how US courts use both the business judgment of directors and courts’ own business judgment without stating the metrics that plaintiffs would use to assess courts’ business judgment. Qualls captures this conundrum when he posited that the “court has failed to provide any standard for determining when a court's independent judicial business judgment is warranted. Litigants need to know what factors the court will consider when deciding whether to proceed”.Footnote 89
Away from derivative suits, the business judgment rule has been utilized to absolve a company that failed to disclose a highly profitable mineral discovery, contrary to the Federal Securities and Exchange Commission rule.Footnote 90 The court has held that “the timing of disclosure is a matter for the business judgment of the corporate officers entrusted with the management of the corporation”.Footnote 91 In some cases, courts only refuse to apply the rule in favour of directors if the complainant adduces evidence that the directors were “grossly negligent”.Footnote 92 Thus, in Aronson v Lewis, the Delaware Supreme Court succinctly stated that “while the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule, director liability is predicated upon concepts of gross negligence”.Footnote 93 Similarly, in Washington Bancorporation v Said,Footnote 94 the Federal Deposit Insurance Corporation instituted a suit against the directors of an insolvent bank who had granted a loan of $10 million to a company without investigating the company's financial statement. The directors also approved a compensation scheme for the bank's president upon the termination of his employment because of the bank's takeover. The Federal Deposit Insurance Corporation alleged that the directors were grossly negligent in their conduct because they did not conduct thorough investigations before approving the loan and because they relied on the opinion of the bank's solicitors and committees when they approved the payment of compensation to the president. The US District Court for the District of Columbia held that the transactions that the directors approved were routine in nature and, as a result, they should not be held liable for gross negligence.Footnote 95
In most cases, there is confusion as to whether the court's application of the concept of gross negligence by directors in making business decisions is limited to the substance of the decision or to the process through which they arrived at the decision.Footnote 96 In Smith v Van Gorkom,Footnote 97 the board of directors approved the takeover of the company for $55 per share after two hours’ deliberation. The board did not seek the opinion or report of the investment bankers or any other document that would justify the share value of the takeover. Rather, the board relied heavily on a 20-minute oral report by the board's chairman. The Delaware Supreme Court looked at the board's procedure for approving the takeover and held that the business judgment rule would not apply because the directors had been grossly negligent.Footnote 98 One obvious challenge with this approach that supports non-judicial interference with the merits of the decision is that it is often difficult to separate the reasonableness of the process and “the substantive reasonableness of directors’ decisions”.Footnote 99 Framed another way, the determination of the reasonableness of the process will often be contingent upon the reasonableness of the decision.
CODIFICATION AND APPLICATION OF THE US BUSINESS JUDGMENT RULE: IS IT FIT FOR PURPOSE FOR NIGERIAN CORPORATE LAW?
As in other jurisdictions, the jurisprudenceFootnote 100 and company law of Nigeria recognize that the board of directors manages the company's business and that the directors owe a duty to the company to exercise the due care and skill that a reasonably prudent director would exercise in comparable circumstances.Footnote 101 A director who breaches this duty would be liable in an action for negligence.Footnote 102 It could be gleaned from the Nigerian law that the objective test is the predominant test in determining directors’ liability for breach of their duty of care and skill. In essence, if a reasonably cautious director in the same position as a director who is alleged to have breached the duty of care would have exercised his discretion in a different manner, the director's personal belief, even if honest, is immaterial. These provisions mark a radical departure from the business judgment rule in the US, where the director's personal assumptions and belief that he is acting in the company's interest are critical in determining his liability. Thus, the statutory rule in Nigeria implies that “if a company appoints a moron, it is well within its rights to still expect him to measure up to the standard of a notional, reasonable director”.Footnote 103 Suffice it to say that the Nigerian law imposes a strict liability regime on directors once the reasonably prudent director's test is applied. Also, as noted above, a director who fails the reasonably prudent director test would be liable in an action for negligence. The peculiarity of the penal regime under the Nigerian law is that it does not create a multi-layered degree of negligence. Indeed, once a director fails the test, the law would hold him liable for negligence without assessing whether his conduct should be classified as gross negligence or simple negligence. The critical question that follows is: does Nigerian corporate law need the rule to be codified and applied? This section argues that Nigeria does not need it, for the reasons set out below.
Shareholders’ derivative litigation
The first reason why the business judgment rule should not be codified and applied in Nigerian corporate law is because of its negative implications for derivative actions. Similar to other jurisdictions, Nigeria's company law recognizes that the company has a corporate personality. Indeed, a company is a person in law distinct and separate from its members. This legal personality of a company not only confers legal rights, but also imposes legal duties on the company. Subsequently, if a party does an act that infringes upon the company's corporate rights, only the company can sue to enforce its legal rights.Footnote 104 The law, however, recognizes that there are instances where the directors are the wrongdoers and may wish to frustrate any action that would remedy the wrong against the company. As a result, the law makes provisions that allow a shareholder to bring an action on behalf of the company.Footnote 105
A major plank in the conditions precedent for a shareholder derivative action in Nigeria is that the applicant must have “given reasonable notice to the directors of the company of his intention to apply to the court if the directors do not bring, diligently prosecute or defend or discontinue the action”.Footnote 106 One unique feature of this provision is that, while it allows the directors the opportunity to do the needful, it does not foreclose the aggrieved shareholder from prosecuting the claim on behalf of the company if the directors fail to do so. More fundamentally, it does not clothe the directors with the broad discretion and power to set up a committee whose possible “subjective” decision will terminate a shareholder derivative suit that may turn out to be beneficial to the corporation.
As noted earlier, US corporate law and jurisprudence recognizes the use of an SLC in determining whether or not a derivative action should proceed. Although it may be argued that US courts, in respecting an SLC's decision and applying the business judgment rule, would consider whether “the directors delegate their decision-making authority to a disinterested committee”,Footnote 107 it is argued that there is no guarantee that an SLC would consist of disinterested members or be free from “structural bias”.Footnote 108 In essence, notwithstanding the court's decision in Zapata, which seemed to suggest that the court could apply its own business judgment in determining the propriety or otherwise of the committee's motion to dismiss a derivative suit, the court noted that: “[w]e must be mindful that directors are passing judgment on fellow directors in the same corporation, and fellow directors, in this instance who designated them to serve both as directors and committee members. The question naturally arises whether a ‘there but for the grace of God go I’ empathy might play role”.Footnote 109
Furthermore, the use of an SLC inevitably gives the impression that the SLC has assumed the duty of the courts in resolving shareholders’ derivative suits. More fundamentally, the statutory hurdles for shareholders’ derivative actions in Nigeria are already burdensome. Thus, apart from the requirement that the shareholder should give notice of his intention to apply to the court if the directors fail to prosecute the action, the law also requires the shareholder to obtain leave of the courtFootnote 110 and adduce evidence that the wrongdoers are the directors who are in control and that they would not take the necessary action.Footnote 111 The shareholder must also establish that he is acting in good faithFootnote 112 and that it is in the company's best interest that the action be brought.Footnote 113 Discharging this evidential burden is no mean feat. As a result, the application of the US business judgment rule will compound the extant onerous hurdle in proving liability for harm done to the company in shareholders’ derivative litigation in a climate with weak minority shareholders and more closely held corporations, which makes it difficult for dissatisfied shareholders to find a market in which to sell their shares.Footnote 114
In addition to this challenge, Nigeria's corporate law, unlike that of the US, does not recognize the demand rule. The core thrust of this rule in the US is that a shareholder will be excused from making a demand that the directors institute a derivative suit if it clear that there is a conflict of interest among the directors and that a greater percentage of the directors are the wrongdoers.Footnote 115 In other words, the court would endorse such a demand on the grounds that the directors have interests in the subject matter of the suit and that it would be futile to ask the shareholder to demand that they bring the suit. In the case of Nigeria, a shareholder in a derivative action must make a demand to the directors to sue before he can apply to the court to bring the action on behalf of the company. The implication of this is that a shareholder in the US has better protection than his Nigerian counterpart. To apply the business judgment rule to the Nigerian shareholder in a derivative action would require the shareholder to overcome the double hurdles of the directors’ decision to bring the suit on behalf of the company and the court's power to review the directors’ business decision. This would pare down shareholders’ ability to obtain relief for wrongs done to the company.
Variegated standards of duty of care and skill and the business judgment rule in both jurisdictions
As noted above, the standard for the duty of care and skill under Nigerian corporate law is that which “a reasonably prudent director would exercise in comparative circumstance”.Footnote 116 This test, as stated earlier, is clearly objective. It is argued that this test imposes a good standard of care and skill on directors. In fact, the statutory provision in its current state will, to a great extent, encourage honest and reasonable persons to take up directorial positions in companies. By contrast, under the business judgment rule in the US, the test is subjective in the sense that a director will not be liable if he adduces evidence that, at the time of making the business decision, he believed it to be proper in the circumstance and that he had a rational conviction that the decision was in the company's best interests. The problem with the US test is that “the focus is not on what the hypothetical reasonable director would have done but on what some rational director might have done”.Footnote 117 In addition, the requirement that the director should rationally believe that the decision is in the company's best interests raises a more fundamental problem. This is because, as noted by a scholar, “in truth, this rational basis has little if anything to do with the care that went into the decision. Rather, it serves as an objective confirmation of the critical, but entirely subjective requirement that the directors have a good faith belief that their decision is in the corporation's best interest”.Footnote 118
Besides this objective / subjective standard argument between the statutory duty of care and skill in Nigeria and the business judgment rule in the US, it is important to reiterate that, under the statutory duty of care and skill in Nigeria, a director who breaches the duty could be liable in an action for negligence. This provision recognizes the fundamental challenge with which corporate law grapples: to ensure that directors who may not own shares in the company conduct the company's affairs with circumspection.Footnote 119 With respect to the US, case law suggests that the standard for the application of the business judgment rule has shifted from “simple errors”Footnote 120 to gross negligence.Footnote 121 There are two problems with this reformulation of the standard for liability. First, in some instances, what amounts to gross negligence is ambiguous.Footnote 122 Also, the “gross negligence standard” contradicts the normative standard of ordinary negligence in the law of tort and the breach of duty of care and skill in an agent-principal relationship.Footnote 123 It is therefore argued that, if Nigeria's corporate law adopts this soft and merciful standard, it runs the risk of whittling down the duty of care and skill because it would convey “legislative signals that negligence is acceptable provided the directors and officers thought they were benefitting the company”.Footnote 124
“The “gross negligence” standard in the US seems to be informed by the fact that, if the courts applied the ordinary negligence standard, it would expose directors to a litany of litigation. The extension of this argument to Nigeria is quite problematic. In fact, it is argued that there is no guarantee that the application of the US business judgment rule in Nigeria would minimize directors’ exposure to the risk of litigation for breach of the duty of care and skill. To the best of the knowledge of this author, there is currently a dearth of cases in Nigeria against directors for breach of duty of care and skill.Footnote 125 This suggests that the extant statutory provision is fit for purpose. In other words, the current statutory formulation has enhanced directors’ duty of care and skill in Nigeria and limited the flood of potential litigation against directors for breach of the duties. This supports the argument that the implementation of the US business judgment rule could increase litigation against directors for breach of the duties, because the rule is only deployed against directors when their business judgment fails the tests for the application of the rule. It follows that, if the conditions for the application of the rule are not established, shareholders will then have unlimited licence to bring legal actions against directors.Footnote 126
Difference in corporate law culture and the order of recognition of duty of care and the business judgment rule
The corporate law culture and the order of recognition of the business judgment rule and the duty of care in the US raise serious issues about the feasibility of the codification and application of the business judgment rule in Nigeria's corporate governance regime. Essentially, the American corporate governance approach has regard for director primacy.Footnote 127 Under this approach, “accountability through judicial intervention should yield to directorial authority”.Footnote 128 It seems that one reason for the deference of US corporate law and courts to the power of directors ultimately to take decisions for corporations arises from the fact that the US has large corporations and diversified shareholders. As a result, there could be organizational challenges among shareholders with respect to how to operate the companies. Bainbridge supports this view when he persuasively contends that: “[a]uthority-based decision making structures are characterized by a central agency empowered to make decisions binding on the firm as a whole, tend to arise when the firm's constituencies face information asymmetries and have differing interests. Because the corporation demonstrably satisfies those conditions, vesting the power of fiat in a central decision maker is the essential characteristics [sic] of its governance”.Footnote 129
Apart from this reason adduced by Bainbridge, it seems that the director primacy model in the US arose because of the political and legal expediency to protect directors who take risky business decisions. In fact, with respect to the business judgment rule, it has been noted that the rule: “[h]as assumed a new role in the twilight of the twentieth century. These are years that have witnessed the spate of foreign payments incidents out of which stemmed not only a series of lawsuits to recover the value of such payments for corporations, but also stirrings in congress, regulatory bodies such as the Securities and Exchange Commission and elsewhere”.Footnote 130
By contrast, Nigerian corporate law culture places more emphasis on the shareholder primacy approach. This model of corporate governance believes that directors are ultimately trustees and agents of the stockholders of the companyFootnote 131 and that “corporate law's objective is to develop legal structures that will maximize shareholder wealth”.Footnote 132 This approach finds justification in the fact that a company is “an aggregate of its shareholders”Footnote 133 and “shareholders are not only owners but also risk bearers”Footnote 134 in the company. Some case law provides a paradigmatic illustration of this point. In the seminal case of Okeowo v Migloire, the court noted that the fiduciary duties of directors are for the benefit of the corporation as opposed to any individual director.Footnote 135 Also, in Artra Industries (Nigeria) Ltd v NBC1, the Supreme Court of Nigeria held that, whenever directors of a corporation are exercising their managerial powers and duties, they must show crass compliance with the law, which requires them to regard the corporation's interest as paramount.Footnote 136
From an axiological perspective, the deference to the shareholder primacy approach in Nigerian statutes and jurisprudence is justified if one considers that the director primacy approach is prone to encourage malfeasance, undue risk-taking and greed in the governance of corporations. The 2008 financial crisis in the US and other parts of the world clearly attests to this fact.Footnote 137 Indeed, literature on corporate failures in the US in the past decade is replete with the fact that US corporate law culture encourages excessive risk-taking.Footnote 138 In particular, the sub-prime mortgage market failures of notable financial institutions such as Fannie Mae, Freddie Mac and Lehman Brothers were largely due to unregulated risk-taking by directors and deference to directorial decision making in US corporate law and culture.Footnote 139 Regrettably, as one scholar noted, notwithstanding the conduct of the directors, some were immune from personal liability because of the protection afforded to them by the business judgment doctrine.Footnote 140 In Nigeria where directors’ accountability and undue corporate risk-taking are potential problems, the application or transplantation of the business judgment rule will make directors lack the gravitas required for the management of corporations and will encourage moral hazards.
Further, unlike in Nigeria, the business judgment rule was well-developed in the US before the duty of care. Consequently, it shaped the substance of the duty of care.Footnote 141 As Lyman noted with respect to one US state:
“The primacy of the business judgment rule over fiduciary duties in Delaware's analysis of director performance is an accident of history. The duty of care, being a doctrinal latecomer, was along with the duty of loyalty, embedded into the pre-existing business judgment rule framework in Cede, in an effort to harmonize those duties with the rule. But the rule has retained analytical preeminence, leading to a diminished emphasis on what is really the most critical to corporate governance, both in and out of court: Did directors fulfil or breached [sic] either of their fiduciary duties?”Footnote 142
Indeed, the earlier arrival and application of the business judgment rule has made the duty of care subservient to the rule and opened the floodgates for situations where courts deploy or misapply the rule whenever breach of directors’ duty of care should be called into question.Footnote 143 Applying the rule to Nigeria, with a different history of emergence of the duty of care and the business judgment rule, would create doctrinal tensions, serious problems of interpretation similar to the experience in US case law and attendant uncertainties regarding corporate law. Thus, such a pluralist model of determining directors’ breach of duty would create a situation where courts may not only face difficulties in determining which one should be accorded greater importance, but also struggle to strike a proper balance in applying the duty of care and the rule.
CONCLUSION
This article has shown that the business judgment rule serves as a “principle that directors can employ to shield their decisions from judicial scrutiny”.Footnote 144 Notwithstanding the various rationales and tests for the application of the rule in the US, the rule seems to hold the neoclassical theory opinion that directors may be altruistic in the discharge of their duty to the company and will always act in the interest of the shareholders.Footnote 145 This article has also demonstrated that, despite the rule's underlying objectives, its codification and application are not necessary for Nigeria because of the enormous differences in corporate law and business environment between the two jurisdictions. The difference in shareholders’ derivative litigation, standards of duty of care and skill, corporate law culture, and the distinct historical period in which the business judgment rule and the duty of care and skill were recognized in the US make the codification and application of the rule undesirable for Nigeria. It is, therefore, argued that the current statutory provisions regarding duty of care in Nigeria should be retained because they serve their purpose and suit the peculiarities of the Nigerian business environment. Thus, the objective standard in the law helps to deter directors from reckless conduct or unnecessary risk taking. It also provides a definite and just standard through which to assess directors and hold them personally liable for their reckless or delictual conduct. Therefore, the transplantation of the business judgment rule to Nigeria would not only diminish the importance of the statutory duty of care and skill, but would also not generally augur well for corporate governance in Nigeria.Footnote 146 Little wonder that a mainstream scholar of corporate law noted that the business judgment rule “is a phrase of limited utility and much potential mischief. Accordingly, the business judgment rule is a rule which corporate law would well do without”.Footnote 147
CONFLICTS OF INTEREST
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