Question

In which of the following cases would the business judgment rule be most likely to protect directors of a corporation? A. The directors of QuickClips increase the pricing structure of their mail-order DVD service based on extensive market research, but then the company nearly goes bankrupt when customers revolt against the new pricing. B. A director of Office Strategies, Inc., convinces a friend in the marketing industry to fabricate research supporting the director's pet project at Office Strategies, which turns out to drain the company's profits. C. The directors of Impact Media, Inc., agree to merge with Dynamic Pictures based on a valuation estimate provided by Dynamic's bankers and later discover the valuation provided was considerably lower than market levels. D. A director of C2U Chemicals, Inc., who is also a consultant at McKinsey & Company, helps negotiate a consulting engagement with McKinsey on behalf of C2U, which later results in a breach of contract suit between the companies.

Answer 1

A. The directors of QuickClips increase the pricing structure of their mail order DVD service based on extensive market research, but then the company nearly goes bankrupt when the customers revolt against the new pricing.

Step-by-step explanation:

Directors of companies are protected by business judgement rule, against allegations by shareholders in the manner they carry out business. The rule tends to protect directors by the court believing that correct decisions might not be made by the directors at all times.

The rule spelt out the fact that in the course of directors carrying out their responsibilities, some business decisions which are controversial and one which may put the company in jeopardy could be made. It allows directors to carry out their duties at their own discretion and acting in good faith without intimidation of prosecution by the shareholders.

There are however exceptions to the rule, some of which are directors acting in bad faith, engaging in conflict of interest, fraud etc.