Shield or Sword? The Business Judgment Rule and Its Role in Minority Oppression in Close Corporations, Current Approach in US Case Law

Abstract

The business judgment rule (BJR) is a significant and much-discussed principle in corporate law, designed to protect directors' decisions from judicial intervention, provided those decisions are made in good faith, with due care, and in the best interest of the corporation. The rule operates on the presumption that directors are better positioned to make business decisions, as they possess both the relevant expertise and access to detailed corporate information. Courts, therefore, generally refrain from second-guessing directors’ decisions unless there is evidence of fraud, illegality, or gross misconduct. 

In close corporations, however, the dynamics are distinctively different from those of public corporations. Close corporations typically feature a small number of shareholders, limited marketability of shares, and a higher concentration of ownership and control. In such companies, the majority shareholders often hold significant influence over corporate decisions, including dividend distribution, employment, and strategic direction. This concentration of power creates a risk of minority shareholder oppression, where the majority may leverage the BJR as a shield against judicial review, potentially enabling actions that undermine minority interests. 

In this study, after explaining the fundamental principles of the business judgment rule and the unique characteristics of close corporations, the evolution of the rule in U.S. court decisions will be examined, with a focus on preventing decisions that oppress minority shareholders in such corporations from evading judicial scrutiny.

Keywords

• Minority shareholders
• Oppression
• Controlling Shareholders
• Close Corporation
• Business Judgment Rule

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