Business Judgement Rule

The business judgment rule provides a director of a corporation immunity from liability when a plaintiff

 sues on grounds that the director violated the duty of care to the corporation so long as the director’s
actions fall within the parameters of the rule.
In suits alleging a corporation's director violated their duty of care to the company, courts will evaluate the
case based on the business judgment rule. Under this standard, the court will uphold the decisions of a
director as long as they are made (1) in good faith, (2) with the care that a reasonably prudent person
 would use, and (3) with the reasonable belief that the director is acting in the best interests of the
corporation. 
Practically, the business judgment rule is a presumption in favor of the board. As such, it is sometimes
referred to as the "business judgment presumption."
There are a number of ways to defeat the business judgment rule. If the plaintiff can prove that the director
acted in gross negligence or bad faith, then the court will not uphold the business judgment rule. Similarly,
if the plaintiff can prove that the director had a conflict of interest, then the court will not uphold the
business judgment rule.
When the corporation pleads the business judgment rule, if the court finds that the rule applies, then the  
burden of proof shifts to the plaintiff to prove that the business judgment rule does not apply. However, if
the court finds that the rule does not apply, the burden shifts against and the board must prove that the
process and the substance of the transaction was fair
 What Is the Business Judgment Rule
 The Business Judgment Rule is a legal doctrine that helps to guard a corporation's board of directors
against frivolous legal allegations about the way it conducts business. A legal staple in common law
 countries, the rule states that boards are presumed to act in "good faith"—that is, within the fiduciary
 standards of loyalty, prudence, and care directors owe to stakeholders.
 Fiduciary standards include the "duty of care" and the "duty of loyalty." The first is an obligation to
act on an informed basis. The second requires directors to put the interests of the corporation and
over their own self-interest or the interests of others.
 Enron
The Enron Scandl is one of the largest in the US corporate history.IT was revealed in October 2001
Enron was formed in 1985 by Kennath Lay after merging the natural gas pipeline companies of Houston Natural Gas
and InterNorth. In the early year 1990s deregulation of sale of natural gas in the US made it possible for Enron to sell
energy at higher prices , thereby significantly increasing its revenue.Enron to become the largest seller of natural gas in
North America by 1992. In an attempt to achieve further growth ,Enron pursued a diversification strategy . The
company owned and operated a variety of assets including gas pipelines ,paper plants waterplants etc.The corporation
also gained additional revenue by trading contracts for the array of products and services it was involved in.
Flaws of Cororate Governance
> Board of directors
> Audit Committee
> Low Ethical Standards
> Stakeholders
> Whistle Blower
> Failure of the financial audit
Aftermath of the Enron Scam
 It eventually led to the bankruptcy of the Enron Corporation. which was an American
energy company. Enron $63.4 billion in assets made it the largest corporate bankruptcy in
US history at that time.
 As a consequence, shareholders lost nearly $11 billions end of nov 2001
 Many excutives of Enron including the chairman Mr. Kennath Lay, president Mr. Jeffery
Skilling, and chief Financial Officers and Mr. Andrew Fastow were indicted and later
sentenced to prison.
 Enron’s auditor, Arthur Anderson, was found guilty and altimately the audit firm was
closed down.
 Employees and shareholders received limited returns in lawsuits, despite losing billions in
pensions and stock price.
 In the aftermath of the scandal , new regulations and legislations were enacted in the US to
increase accuracy of financial reports
Causes of downfall
 Faulty Revenue Recognition model

 Mark to market accounting

 Excessive Executive Compensation

 Risk mis- management

v
 Woldcom
Woldcom was the number two largest long- distance phone company of the US. The
company applied for bankruptcy under the US laws in July 2002.with$107 billion in assets,
Woldcome bankruptcy was the largest in United States history.
Rise of Worldcom
Worldcom began in 1983 as a small provider of long distance telecom service under the name
“ Long Distance Discount services”(LDDS). The venture was profitable right from the
starting. In 1985 Bernie Ebbers became the company CEO.Ebbers reportedly played a major
role in the success of LDDS in the following years . The company went public in 1989 when
it acquired advantage companies Inc,.A publicly traded long distance telecom services
company. Throughout the 1990s, the company continued to grow by acquiring various
companies and expanding its operating across the world. The acquisitions boosted Worldcom
revenue report is $154 million in1990 to 39.2 billion in 2001. It purchases UU Net, Compu
serve and American data network
 Causes of the failure of WorldCom
 Inorganic growth and poor Customer service.
 Failed Merger
 Oversupply
 Accounting fraud
 Bankruptcy
Flaws in Corporate Governance
 Weakness in control system
 Dominance of the CEO
 Board of directors
 Audit Committee
 Audit Failure
Aftermath-
 On July 21 2002 woldcom filed for bankruptcy production, the laegest such
filling in US history. In2004 the bankruptcy with about $5.7 billion in debt
 On April 14 2003 Woldcom changed its name to MCI. Under the bankruptcy
reorganization agreement the company paid $750 million to the Securities and
Exchange Commission in cash and stock MCI which was intended to be paid to
the investors who suffered on account of the failure .
 In March 2005 Bernard Ebbers, the CEO of the company was guilty of all
charges related to the $11 billion accounting scandal at the telecommunications
company he founded and convicted of fraud
 Worldcom stock had fallen from a high of $64.50 a share in mid 1999 to less than than $2
a share. The price fell down below$1 a share.
 Worldcom employees who hold the company’s stock in their retirement plans .also
suffered losses
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