Question

Machine Malfunction. Bruno, the president of a corporation operating work out facilities, convinced the board of directors to approve a large purchase of a type of fitness machine called "Perfect Body." Bruno had carefully investigated the machine and did a presentation to the board on its purported benefits. Unfortunately, after the purchase, it was announced that "Perfect Body" was actually a very dangerous machine that should not be used. The manufacturer of "Perfect Body" went bankrupt, and the corporation lost $200,000 on the purchase of the machines. The shareholders are furious and want to sue Bruno and the directors. The board of directors agrees to allow Frances, the ringleader of the shareholders, to purchase stock of the company at below its fair market value. She purchases a considerable amount of stock on that basis, but says that the shareholders plan to continue with an action against Bruno and the board members.
Required:
1. Under which of the following should Bruno and the board of directors defend themselves in an action brought by shareholders for harming the corporation?
O The Superior Judgment Rule
O The Research and Investigation Rule
O The Business Judgment Rule
O The Rule of Corporate Integrity
O There is no defense.

Answer 1

Answer:

The correct answer is letter "C": The Business Judgment Rule.

Explanation:

The Business Judgment Rule is a law that protects a company's Board of Directors (BoD) from inconsistent allegations from shareholders stating that the BoD is acting against the stakeholders' interest. The law presumes that members of the BoD act in "good faith" and that they do not always make the best decisions.  

The Business Judgment Rule helps managers, in such a way, to avoid laws where there is no substantial proof that they had intentions to go against the investors' will.