Galactic Stupidity and the Business Judgment Rule - College of Law

322 The Journal of Corporation Law [Winter
a judge might engage in substantive review under the business judgment rule is perhaps
small because virtually any decision by a director that is not disloyal can, in some way,
be found rational. But where a court finds no evidence of rationality, it will inevitably ask
if the substance of the decision was reasonable. As such, a court may very well find bad
faith by simply evaluating the sheer galactic stupidity of a decision.
VIII. CONCLUSION
Courts correctly shy away from reviewing the substance of a director’s decision
unless it is clear that the director had a conflict of interest that influenced his decision.
This policy serves the purpose of allowing directors to take risks in the interests of the
corporation. But it is wrong to insist that courts must never examine the substantive
reasonableness of directors’ decisions. Such a proscription ignores the ability of courts to
evaluate what a reasonable director would do by taking into account the speculativeness
and inherent risk-taking necessary to run a corporation. Where disputes do not present
evidence regarding the procedural reasonableness of a director’s decision or evidence
regarding the director’s state of mind, courts must inevitably evaluate the substance of the
director’s decision. Courts do not usually have to make such an inquiry, but they will in
cases that approach the edge of the business judgment rule’s protections. Courts will not
often impose liability for the galactic stupidity of directors, but the possibility must at
least exist, or the duty of good faith dissolves completely (and therefore uselessly) into a
duty of loyalty and nothing more. There is no danger in asking what a reasonable director
would do because the answer is: a reasonable director would make the kind of decision
that a rational director, acting in good faith, would make. And that standard is not any
more strict than the one that already prevails under the business judgment rule.
Delaware cases that suggest that substantive review is appropriate in extreme circumstances. Id. at 274-75.
Disney IV is surely a fourth.