By Abdullah Alkayat

Corporate board decisions rely on genuine intent which operates within the protective framework of the business judgment rule. Board members of corporations hold the responsibility to make strategic decisions that determine the company’s future direction. The decisions of board members use the best available information but still often result in unsuccessful outcomes. Legal systems in the United States acknowledge this reality by offering directors protection through the business judgment rule which prevents liability for board members who demonstrate good faith and due diligence while honestly believing their actions benefit the company.

The legal protection exists because it focuses on the sincere intentions of directors during their decision-making process. Board members who make decisions with genuine sincerity and without personal gain maintain their status as legitimate voters regardless of the outcome of their decision. Directors who operate with hidden agendas or falsify their beliefs expose themselves to legal consequences. The Virginia Bankshares Case demonstrates how judicial evaluation of board member intent emphasizes the necessity of honest voting practices. The Supreme Court case Virginia Bankshares, Inc v Sandberg, 501 US 1083 (1991), serves as a key example of judicial evaluation of board members’ true intentions. The board of Virginia Bankshares gave approval for a merger because they stated it served shareholders’ best interests. Subsequent claims revealed that board members doubted the fairness of the merger but approved it for undisclosed reasons.

The US Supreme Court held that directors’ public statements about a decision being beneficial may violate securities laws if they privately disagree with this assessment. The ruling establishes that board members’ real intentions determine if they can be shielded from liability. Their genuine belief in the correctness of their decision provides them with good faith protection even when their decision proves incorrect. Shareholders could take legal action against directors who provide misleading information to them.

Several US judicial decisions apply the Business Judgment Rule to board member liability. The Smith v Van Gorkom (1985) case showed that directors might face liability when they fail to exercise due care during major transaction approvals. The Delaware Supreme Court established that Trans Union’s board failed to conduct an adequate review of the merger before giving their approval and this failure resulted in legal liability. The absence of bad faith did not exclude liability because thorough due diligence is necessary for genuine good faith to exist alongside reasonable decision-making.

The Aronson vs Lewis (1984) decision stated that directors’ choices receive business judgment protection when they demonstrate good faith behavior and proper care and hold a genuine belief that their decisions serve the company’s interests. Judicial intervention is not appropriate for business decisions that fail if those decisions were made with honest intent and experienced reasonable diligence. The decision from In re Walt Disney Co Derivative Litigation (2006) strengthened the protection of directors under the business judgment rule. Derivative Litigation (2006) reinforced this principle. Despite the dispute surrounding executive pay decisions the Delaware Supreme Court supported Disney’s board members. The court acknowledged that negative results alone do not prove directors acted in bad faith. Directors gain protection from the business judgment rule if they adhere to reasonable procedures and demonstrate honest intent.

Corporate decision-making in Kuwait

Kuwait’s legal system follows principles similar to those in the United States regarding board members’ obligation to act with integrity and prioritize company interests. The business judgment rule exists in the United States but Kuwait provides similar levels of protection for directors through its corporate legislation when they demonstrate integrity and diligence.

The Kuwait Companies Law Articles urge board members in public shareholding companies to utilize their powers to support both the company’s goals and shareholder interests. Board members who make decisions in good faith usually avoid personal liability even if their decisions prove unsuccessful. Board members face accountability when misconduct, conflicting interests or negligence evidence exists. Kuwaiti courts follow a similar procedure to American courts when evaluating if board members demonstrated honest intentions and reasonable judgment in their decision-making for the benefit of the company. Directors who prove they performed due diligence and acted without hidden motives generally avoid legal penalties.

The ultimate goal

Corporate decision-making is inherently uncertain. The board members must use current information to make optimal decisions yet well-intentioned choices can sometimes result in negative impacts. The good faith principles in Kuwait and the business judgment rule in the US both acknowledge these risks and shield directors who demonstrate honesty and diligence with genuine intent.

The cases of Virginia Bankshares, Van Gorkom, and Disney illustrate that board members who demonstrate good faith actions retain their status as legitimate decision-makers even if their decisions turn out incorrectly later on. This principle maintains that board members should be able to make strategic decisions without the worry of legal repercussions. An effective corporate governance system requires board members to demonstrate integrity while maintaining transparency and exercising due diligence. The legal systems in the US and Kuwait must protect directors who demonstrate good faith while ensuring misconduct leads to accountability.