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Shlensky v. Wrigley: The Business Judgment Rule [No. 86]

Companies are involved in business decisions every day. Sometimes the managers, board of directors, and shareholders disagree about particular decisions but that doesn’t mean a particular decision should be reviewed in court. Professor Todd Henderson uses Shlensky v. Wrigley as an example of the business judgment rule. https://youtube.com/watch?v=6gb-jV4THL0

Transcript

So one of the core principles of a corporate law is something called the business judgment rule. The business judgment rule is a principle that establishes the kind of review that courts will do of corporate actions. Companies make all kinds of decisions. Those decisions may disappoint various stakeholders of the corporation. Shareholders might not like a decision that the board of directors makes, and they may sue in court and say, "The board of directors, they're the people that we have delegated to make decisions on our behalf in running the corporation. They made a bad decision." And they want to bring that action in court. And the business judgment rule says, courts are not going to second guess business decisions, decisions of the board to do a particular thing. Those things will be judged in the market. Those things can be judged by the people who would buy or not buy the products. And if shareholders don't like the decision, they can sell their shares. One of the key cases to understand the business judgment rule is a case that involves a baseball stadium in my hometown of Chicago called Wrigley Field. And the owner of the Cubs and Wrigley Field resisted pressure to install lights at Wrigley Field. When I was growing up, there were no lights at Wrigley Field, only daytime baseball games. And the Cubs weren't doing very well, and they were losing lots of money. Shareholders sued and said, "This decision not to install lights is not something that maximizes the value of our shares in the Wrigley Corporation." The chair of the Wrigley Corporation defended the decision, not by saying, "I think the long term way to make money for Wrigley shareholders is not to install lights, to build the brand of the Cubs as a day baseball team," but rather said, "Baseball is a daytime sport. I don't want to have night games. I think they're decadent or not the way that the traditional baseball should be played. And also I worry about installing lights in this neighborhood in Chicago, it's going to have a certain deleterious effect on the neighborhood." And the shareholders are up in arms in this, and they say, "The neighbors aren't shareholders in the Wrigley Corporation, you need to act in our best interests. And your idiosyncratic preferences about day baseball as the way it should be played are irrelevant, make us money." And the court in that case, Shlensky versus Wrigley said, "This claim doesn't even get up to bat," to make a bad joke. You cannot criticize actions by the board of directors, business decisions, whether to install lights or not, unless that decision is tainted by some kind of self-interest. If the board of directors is acting to line its own pockets as opposed to the shareholders, then that could be the basis of a suit. But if you're just alleging they're making a bad business decision, too bad, so sad, you can't win in court. You can win in the investment world by selling your shares or not investing in the first place in this particular corporation, that is not a legal claim. So that Shlensky versus Wrigley is an important case, because it describes this judicial abstention known as the business judgment rule.

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