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LAWS4005 Company Law

The University of Newcastle

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LAWS4005 Company Law
  • Subject Code :  

    LAWS4005

  • Country :  

    AU

  • University :  

    The University of Newcastle

Answer:

Answer To Question Number 2

Rationale Of Business Judgment Rule:

The business judgment rule is based on the common principle of company law (Smith 2015). It is a well known concept that company is a legal entity separate from its stakeholders. The directors are the minds of the company and all the important decisions regarding the company have been taken by them. considering the importance of their position, it is assumed and expected that the directors will perform their duties in good faith. In Australia, Corporation Act 2001 has imposed certain duties on the directors. According to this Act, the directors should not misuse their position for earning illegal profit. In case of any failure to this, the directors could face trials for breaching their duties. However, if the director can show that he has done the alleged things for securing the best interest of the company, he could defend his position. This principle is known as business judgment rule.

Business judgment rule is a general defense provision for the directors. Under this principle, the directors should have to show that they have done all the works in good faith and honestly (Harris and Hargovan 2017). A director of a company has to work for the best interest of the company and the shareholders. Therefore, it can be stated that the area is quite large and risky in nature. It is quite reasonable to secure the directors from any derivative claims made by the shareholders. Business judgment rule does the same job. In Aronson v. Lewis. Aronson v Lewis 473 A 2d 805 (Del 1984), it has been observed that if a director has done something for the best interest of the company, he will not held liable for breach of duties.

Does The Rule Provide Much Opportunity To The Directors:

The Business Judgment Rule has been criticised to certain extent. It has been stated that this provides much opportunities to the directors and safely harbor a director against any derivative claims (Fox 2016). In Arson’s case, it has been held that the director should have a reasonable believe that he has done all the acts for the best interest of the company. Further, the directors should have to show that all his works are based on good faith. However, a close interpretation of the rule states that a director could not defend him if he has not prove the reasonableness against all his actions. Further, in Australia, the duties of the directors are under the close vigil of Corporation Act and therefore, it is quite strainfull for the directors to prove their innocence regarding their duties. In Daniels v Anderson (1995) 37 NSWLR 438, it has been observed that a director of a company is required to worrk for the best interest of the company and to this effect he has to make sure that he has pertformed all the duties. Mere belief regarding the same could not be a good ground and the directors could not take the plea under business judgment rule.

Under the Corporation Act, a director can defend their position under section 1318 or section 1317J and in all these cases, the directors are suffering from certain insecurities. Therefore, business judgment rule has been inserted in the Corporation Act under section 180 (2). According to this section, a director must have to show that he has applied all his duties properly. Further, they have not act for their personal interest. They must be rationally believe that their acts has secured the interest of the company. Therefore, it can be stated that this rule can provide better corporate governance (Neesham and Gu 2015). Further, this rule protects all those directors who act in good faith. However, the nature of the rule is rebuttable and a director could not make any approach if his activities violate the provision of competition law.

Application Of ASIC v Adler In The Case:

This case is a significant case in Australia. The duties of the directors has been filtered through this case. it has been observed that three directors of an insurance company have procured a loan of $10 million to increase the share value of the company. It has been held by the court that the directors have failed to meet all their duties mentioned under section 180 of the Corporation Act 2001 (Barker 2016). Further, it has been observed by court that the directors have failed to use their position properly, as they have procured the loan for gaining profit from it in the form of shareholder of that company. Therefore, they have failed to perform in accordance with section 182 of Corporation Act 2001. In the word of court “business judgment rule is not a guard against the decision taken in pursuit of self interest or the omission to act”. Therefore, the directors are held liable and restricted by the court to take the plea of business judgment rule.

Reference:

Aronson v. Lewis. Aronson v Lewis 473 A 2d 805 (Del 1984)

Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, p.249.

Daniels v Anderson (1995) 37 NSWLR 438

Fox, J., 2016. Acting for you. Governance Directions, 68(2), p.122.

Harris, J. and Hargovan, A., 2017. Still a sleepy hollow? Directors’ liability and the business judgment rule. Australian Journal of Corporate Law.

Neesham, C. and Gu, J., 2015. Strengthening moral judgment: A moral identity-based leverage strategy in business ethics education. Journal of business ethics, 131(3), pp.527-534.

Smith, D.G., 2015. The Modern Business Judgment Rule.

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