Reference no: EM132261135

Regarding Introduction to Business Law - Fundamentals of Business Law, 9th:

The Bezirdjian v. O’Reilly case discuss the law of the Business Judgment Rule (the “BJR”) and how the BJR operates to insulate corporate governance decisions from attack by shareholders except in grievous situations. Generally, the courts will not allow shareholders to litigate over the wisdom of a decision by directors or officers because the BJR rule insulates those decisions from judicial review unless they result from fraud, corporate waste or breaches of the fiduciary duties of care and/or of loyalty. The legal procedure associated with such litigation oftentimes involves hypothetical loss to the corporation that is not personally felt by shareholders, as for example would the case if a bad corporate decision resulted in such a loss of funds that there was no money to pay dividends to shareholders. Understand that the initial damage as the result of a bad corporate decision will be felt by the corporation before the injury trickles down to the shareholders. So what usually happens is that a shareholder (in this case, Bezirdjian) demands that Chevron sue the Chevron board of directors for engaging in illegal oil purchases from Saddam Hussein between 2000 and 2003. This demand is made to the board and in essence sounds something like, “Dear Chevron board of directors: I accuse the directors of engaging in a breach of fiduciary duties, gross mismanagement and waste of corporate assets. I demand that you directors force the corporation to sue you directors to recover damages you directors have caused to Chevron and ultimately to me and my fellow shareholders.” You can imagine the normal human response to such a demand. The pre-suit demand is a pre-requisite to the lawsuit and the case can be dismissed if Bezirdjian proceeds with the lawsuit on his own without having made the demand. Bezirdjian argued that he should be excused from the demand because it would be an exercise in futility to ask the entirely culpable board to order Chevron’s attorneys to sue the members of the board.

Take note of the fact that there are two occasions of (allegedly) wrongful conduct on the part of the board of directors – the first when they allegedly engaged in the deal with Saddam Hussein during a time when American companies were being restricted from doing business with Hussein. The second when the board formed a special committee to consider and issue a recommendation on whether Chevron should sue the directors.

1. Should corporate officers and directors be protected by the business judgment rule?

2. What does it accomplish and how does it seem appropriate in case such as the Chevron case?