Main Content
Board of Directors
Stockholders – as we will see later – have a number of rights with respect to the corporation. However, one right that stockholders do not have is the right to directly manage the day-to-day operations of the business. The general corporation law, as well as the common law, vests exclusive responsibility for corporate management and decisionmaking not with the stockholders, but rather with the corporation's board of directors.
We might like to think that shareholders own and run the business, but they do not. The authority to manage and oversee the operation of the business on a day to day basis is vested exclusively with the board. To the extent stockholders have rights to oversee the operations of the business, those rights are attenuated. Perhaps the most important provision of the Delaware corporate law is §141. Delaware is by no means unique; every state has its equivalent to §141. Section 141 centralizes decisionmaking authority to the board.
The statutory authority granted to the board by §141 lies at the heart of the business judgment presumption, or the “business judgment rule.” The business judgment presumption is judicial presumption that exists as an acknowledgment of the statutory authority vested in boards, and not shareholders, to run the corporation. The effect of this judicial presumption is to cause courts to defer to decisions of the board in most matters when those decisions are challenged by stockholders.
This presumption is quite powerful and have effects beyond the courtroom. Because courts will generally abstain from intervening in disputes between stockholders and boards about most business decisions, boards will feel a great deal of latitude and independence in their decision making process. The insulation from stockholders afforded by this judicial presumption encourages boards to take business risk.
This book, and all H2O books, are Creative Commons licensed for sharing and re-use with the exception of certain excerpts. Any excerpts from the Restatements of the Law, Principles of the Law, and the Model Penal Code are copyright by The American Law Institute. Excerpts are reproduced with permission, not as part of a Creative Commons license.