Liability for Business Decisions & Wisconsin’s Business Judgement Rule

08.26.16

Under Wisconsin law, most board decisions are governed by the business judgment rule. Wisconsin’s business judgment rule limits a court’s review of corporate-decision making when directors make business decisions on an informed basis, in good faith, and in the honest belief that the action is taken in the best interests of the company. The business judgment rule is meant to ensure that management remains in the hands of the board of directors and that courts do not become too deeply involved in internal corporate matters. Without the protection of the business judgment rule, directors might be hesitant about making decisions that could be deemed risky. To that end, the business judgment rule precludes director liability to the company or shareholders for honest mistakes including negligent acts and omissions.

Historically, the business judgment rule was comprised of rulings by courts. The business judgment rule providing immunity for directors is now codified under Wis. Stat. § 180.0828. The statute provides the controlling rule. Under the statute, a director is shielded from liability for breach of or failure to perform any duty resulting solely from his or her status as a director, subject to certain exceptions. Directors may not be held liable by a corporation, its shareholders, or any person asserting rights on behalf of the corporation or its shareholders. The exceptions to the general rule are:

1. A willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director has a material conflict of interest
2. A violation of criminal law, unless the director has reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful
3. A transaction from which the director derived an improper personal profit
4. Willful misconduct

It is also worth noting that a corporation may limit the immunity of directors under the business judgment rule in its articles of incorporation. As taking such action would increase the liability of directors, many businesses will choose not to pursue this option. A limitation will apply if a cause of action against a director accrues while the limitation is in effect. As a practical matter, business organizations should evaluate the need for Directors and Officers insurance and should secure coverage in appropriate cases.