The Business Judgment Rule in Civil Procedure

How is the business judgment rule applied procedurally? What impact does it have on pleading, motions practice, and jury charge?

Civil Procedure and the Business Judgment Rule

Pleading

While the business judgment rule is referred to frequently as a “defense,” it is not an affirmative defense and need not be pleaded by the defendant.  On the contrary, it is the plaintiff’s burden to plead and prove that the business judgment rule does not apply when a breach of the duty of care is alleged.

In Sneed v. Webre, the Court characterized the business judgement rule as a matter that the “plaintiff must plead and prove.”  The Court wrote that it would be “insufficient” for a shareholder to merely allege mismanagement or neglect or an abuse of discretion in conducting the affairs of the corporation.  The El Paso Court of Appeals recently wrote that “a plaintiff carries the burden the on merits to plead (and then of course to prove) something more.”

Burden of Proof

The El Paso Court of Appeals recently held: “To best give effect to the policy rationale underpinning the business judgment rule, we conclude that it was part of [the plaintiff’s] case to disprove the business judgment rule.” 

Special Exceptions and Summary Judgment

The application of the business judgment rule is a legal question, so it would ordinarily be addressed in special exceptions or summary judgment. If the plaintiff pleads a claim of merely negligent mismanagement and fails to plead clearly an exception to the business judgment rule, then “[s]uch allegations may be disposed of on special exceptions or summary judgment.”

Jury Charge

Assuming that the plaintiff successfully pleads an exception to the business judgment rule and raises more than a scintilla of evidence to support it in response to the summary judgment, then the jury will need to be charged as to the plaintiff’s theory of liability. The business judgment rule is not an affirmative defense, therefore it would not be proper to instruct the jury that the defendant would not be liable if his actions were “merely negligent, imprudent, or unwise.” Rather, negating the business judgment rule is part of the plaintiff’s case, and the specific basis must be part of the plaintiff’s liability question.

For example, if the basis for negating the business judgment rule is gross negligence, then the plaintiff’s liability question would include a definition of gross negligence, and the jury would not be instructed on any definition of simple negligence or mismanagement.

If the basis is abdication of duty or lack of information, then there would probably need to be a separate question, such as “Did [Defendant] fail to exercise reasonable business judgment in [the subject transaction],” or “Did [Defendant] fail to reasonably inform himself prior to deciding [the subject transaction].”

Some exceptions would almost always be established as a matter of law and thus would not figure into the jury charge at all. Examples would include self-dealing, ordinary course of business, and inaction. Also, no instruction would be given if the theory of liability precluded application of the business judgment rule: breach of the duty of loyalty, ultra vires, illegal misconduct, or fraud.

Directed Verdict

The El Paso Court of Appeals recently made clear that the business judgment rule gives the defendant a significant second bite at the apple on a motion for directed verdict. That case involved a claim for mismanagement against officers and directors of a corporation on the basis of several discrete transactions that the plaintiff contended were negligent and harmed the company. The court of appeals held that, “on directed verdict, [the plaintiff] carried the burden of showing the corporate actions of which he complains were not protected by the rule.”  The trial court granted directed verdict on the claims. The court of appeals reviewed the factual record regarding each of the subject corporate actions and held that the plaintiff failed to establish any basis for overcoming the business judgment rule and affirmed.

This post is taken from HCWD, PLLC recently published White Paper, The Duty of Loyalty and the Business Judgment Rule in Texas. Download the entire paper and get access to the complete legal analysis and case citations.

Texas Business Judgment Rule