Seidman v. Clifton Sav. Bank, S.L.A. - 205 N.J. 150, 14 A.3d 36 (2011)

Rule:

Under the business judgment rule, there is a rebuttable presumption that good faith decisions based on reasonable business knowledge by a board of directors are not actionable by those who have an interest in the business entity. The rule protects a board of directors from being questioned or second-guessed on conduct of corporate affairs, except in instances of fraud, self-dealing, or unconscionable conduct; it exists to promote and protect the full and free exercise of the power of management given to the directors. Stated differently, bad judgment, without bad faith, does not ordinarily make officers individually liable. The rule places the initial burden on the person challenging a corporate decision to demonstrate self-dealing on the part of the decision-makers, or any other disabling factor. If the challenger sustains that initial burden, then the presumption of the rule is rebutted, and the burden of proof shifts to the defendant or defendants to show that the transaction was, in fact, fair to the corporation.

Facts:

In anticipation of its 2005 annual stockholders meeting, defendants issued to plaintiff and other stockholders a notice of the meeting and a proxy statement advising that they would be asked to consider and approve an incentive plan. The stockholders approved the plan and restricted stock awards were issued to the directors and several employees. Plaintiff asserted on appeal that the stockholders' approval of the plan was vitiated by the failure to fully and completely disclose that the full amount of the stock options and restricted stock grants that could be granted to each director would in fact be granted to them. The trial court rendered judgment in favor of defendants, ruling that the plaintiff failed to satisfy his burden to overcome the effect of the business judgment rule. Plaintiff appealed. 

Issue:

Under the circumstances, did the plaintiff satisfy his burden to overcome the effect of the business judgment rule? 

Answer:

No.

Conclusion:

The Court agreed with the lower courts that plaintiff failed to satisfy his burden to overcome the effect of the business judgment rule and to demonstrate that the stock option grants and restricted stock awards given to the directors under the incentive plan constituted corporate waste. The Court found that plaintiff failed to demonstrate that the incentive plan entailed an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade.