Considerations and news on the business judgment rule

The business judgment rule is a rule, of Anglo-Saxon derivation, created by jurisprudence, constantly applied in judgments concerning the liability of directors in corporations (Articles 2392 and 2476 of the Italian Civil Code).

The liability of directors is a culpable liability, so that the director can prove that he is not liable by providing positive evidence that he has fulfilled the duties arising from the office held, with the diligence required by the nature of the office. Furthermore, he must demonstrate that he has done everything necessary to prevent the event or to implement or eliminate its consequences, if he had been made aware of the harmful event.

The business judgment rule considers the entrepreneurial choices made by the directors of a company as unquestionable and therefore the failure of such decisions does not become a criterion that can be used to ascertain liability pursuant to Articles 2392 and 2476 of the Italian Civil Code.

An assessment of the appropriateness of the business plan drawn up by the directors of a company inevitably has an impact on the discretion of the board of directors, a discretion considered unquestionable by the rule in question.

Therefore, the management choices alone cannot be the basis on which a judgment unfavourable to the director may be based in the context of a judgment concerning the latter’s responsibility; on the contrary, the management choices may be used to ascertain the existence of a just cause for revocation.

It should be pointed out, however, that the unquestionable of business decisions is not absolute since the tendency, widespread in courtrooms, is to apply the business judgment rule only if, in fact, the management choice has been legitimately made and if it is considered sufficiently reasonable.

Having highlighted the general and applicative features of this jurisprudential rule, it is now appropriated mentioning the new element introduced by the precautionary order issued by the Court of Rome on 8 April 2020. The order set forth the following principle of law: “the rule of unquestionability of the management choices of directors of joint-stock companies (the so-called business judgment rule) may also be applied with reference to the organizational choices incumbent on directors pursuant to Article 2381 of the Italian Civil Code.

The function of preparing adequate organizational structures is still part of the broader scope of corporate management and must necessarily be exercised using an irrepressible margin of freedom, so that decisions relating to its implementation are included among the strategic decisions“.

In conclusion, the directors’ judgment of liability cannot be based on the errors they have made through management or organisational choices, if these are legitimate and reasonable.

In application of the principle referred to above, therefore, the elements constituting the liability of the members of the management body can be configured by the violation of the obligations imposed by law and the articles of statute and by the violation of the rules of diligence and, above all, of professional prudence which the directors of limited liability companies should adopt in the exercise of their activity.

In conclusion, the business judgment rule does not apply if a director, in the performance of his or her duties, makes management or organisational choices without observing the required diligence and prudence, in which case there may be requirements for applying the rules concerning directors’ liability.