The Business of Judging Directors' Business Judgments in Singapore Courts
(2016) 28 SAcLJ 428
Making business decisions is a risky business. When carrying out their management obligations, directors have to make difficult business decisions which involve weighing uncertain risks and potential benefits to the company. As such, as with any other human lapses, it is inevitable that some of these decisions will turn out to be detrimental to the company. The contentious issue then is whether directors should be held personally liable for their (poor) decisions. This reflects the tension between providing directors with the leeway to make risky but potentially profitable management decisions for the company and holding directors accountable for their actions. The prevalent attitude taken by courts has always been one of not second-guessing business decisions on hindsight. Some countries have gone even further by enacting a formal “business judgment rule” which shields directors from liability if they were well informed, and made these decisions in good faith and in the absence of any conflict of interest. Although Singapore courts have recognised that they should be slow to interfere with commercial decisions, Singapore has not yet followed an emerging global trend of enacting a formal business judgment rule. Rather, it has a more informal business judgment rule. This paper utilises a comparative lens to examine the different formulations of the business judgment rule in leading corporate law jurisdictions and evaluate their effectiveness in protecting directors from personal liability. It argues that the impact of a business judgment rule depends not only on the specific formulation of it but also on the larger corporate governance framework (or, more generally, the context) present in different jurisdictions. Remaining cognisant of the importance of context, this paper then examines the various factors that may justify the adoption (or rejection) of a formal business judgment rule. Finally, the contextual considerations and reasons for adoption or rejection are discussed and applied to the Singapore context to determine if Singapore should indeed adopt a formal business judgment rule. Ultimately, it is suggested that Singapore should enact a specific format of a statutory business judgment rule as this would promote a more favourable environment for doing business by bolstering the perception (if not the reality) of increased certainty in the law regulating business decisions in Singapore’s boardrooms. This is especially so considering the rising level of derivative actions in Singapore.