Insights

This study examines the Business Judgment Rule (BJR), which originated in the United States—specifically in the State of Delaware—and its incorporation into Portuguese law through Article 72(2) of the Commercial Companies Code (Código das Sociedades Comerciais, CSC), contextualized within the fiduciary duties of care and loyalty owed by company directors.

1. Historical Perspective of the BJR in Delaware

The BJR emerged in the 19th century as a response to the need to protect directors from personal liability for business decisions that ultimately failed but were made in an informed, prudent, and loyal manner. Its purpose is to prevent managers from refraining from taking legitimate and beneficial business risks for fear of being held liable for unforeseen failures.

This rule is not codified but is widely recognized in case law and legal doctrine as a presumption that directors act in good faith, on an informed basis, and in the best interests of the corporation. This presumption can only be rebutted by proving a breach of fiduciary duties.

2. Fiduciary Duties: Duty of Care and Duty of Loyalty

a. Duty of Care

This duty refers to the obligation of directors to make informed decisions based on reasonable diligence. The landmark case Smith v. Van Gorkom illustrated the limits of protection under the BJR: the directors' decision was deemed uninformed and negligent, thereby excluding the application of the rule.

The ruling led to a legislative response with the introduction of §102(b)(7) in the Delaware General Corporation Law (DGCL), which allows corporations to adopt exculpatory clauses in their bylaws, shielding directors from liability for breaches of the duty of care—but not for breaches of loyalty or good faith.

b. Exculpation Clause

The exculpation clause under §102(b)(7) of the DGCL protects directors from liability for negligent decisions, provided they acted in good faith and the clause is explicitly included in the company’s bylaws. This provision encourages bold decision-making in risky environments, which is fundamental to the U.S. capitalist system.

c. Duty of Loyalty

This duty requires directors to always act in the company’s interest and refrain from obtaining personal benefits at its expense. Two central aspects are:
(i) the corporate opportunity doctrine (prohibiting directors from taking business opportunities that belong to the company) and
(ii) conflicting interest transactions (where a director’s personal interest may conflict with that of the company).

In Northeast Harbor Golf Club v. Harris, the director was held liable for acquiring land for himself that could have benefitted the company, thus breaching his duty of loyalty. Section 144 of the DGCL sets conditions for validating transactions involving conflicts of interest: they must be approved by disinterested directors or informed shareholders, or be substantively fair to the corporation.

d. Good Faith

Good faith is considered a subset of the duty of loyalty. In cases like The Walt Disney Company Derivative Litigation and Stone v. Ritter, the Delaware Supreme Court held that a breach of good faith implies more culpable conduct than gross negligence. Moreover, the duty to monitor (or supervise) is also considered part of the duty of loyalty. Case law evolved to hold directors accountable for systematic failures in overseeing company activities, as seen in Caremark and Goldman Sachs.

3. The BJR in Portuguese Law

In Portugal, the BJR was introduced by the 2006 reform through Article 72(2) of the CSC, and it is inseparable from paragraphs (a) and (b) of Article 64, which codify the duties of care and loyalty. The Portuguese legislator adopted the philosophy of the BJR but with significant adaptations.

Whereas in Delaware the BJR operates as a presumption in favor of directors (placing the burden of proof on the plaintiff), in Portugal the burden of proof is reversed: the director, when sued, must demonstrate that they acted in an informed, loyal manner and according to business rationality.

a. Duty of Care

According to Article 64(1)(a) of the CSC, directors are required to act with the diligence of a careful and orderly manager. This duty includes:
(i) monitoring the company’s activities,
(ii) gathering and evaluating relevant information,
(iii) making decisions based on business rationality, and
(iv) responding to irregularities.

It also entails the duty of availability—directors must prioritize their corporate responsibilities—and the obligation to remain constantly updated on the company’s activities. Portuguese jurisprudence and doctrine unanimously agree that a breach of this duty entails liability if the decision-making process was uninformed or imprudent.

b. Duty of Loyalty

Article 64(1)(b) of the CSC codifies this duty, which includes prohibitions against competing with the company, exploiting business opportunities for personal gain, and engaging in undisclosed conflicts of interest. Directors are expected to act solely in the corporate interest, while considering the interests of shareholders and other stakeholders—such as employees and creditors—particularly in the context of long-term goals.

Portuguese doctrine, notably authors like Coutinho de Abreu and Paulo Câmara, maintains that the duty of loyalty entails not only abstaining from improper conduct but also proactively promoting the company’s well-being, in a manner consistent with a heightened standard of good faith.

4. Final Remarks

In Delaware, the duty to monitor is embedded in the duty of loyalty, which prevents the §102(b)(7) exculpation clause from being used to escape liability for breaches of supervision. In contrast, Portuguese law treats the duty of supervision as part of the duty of care, eliminating concerns over potential exculpation through bylaws (which are not permitted in Portugal).

Whereas in the American system the BJR operates as a presumption benefiting the director, in Portugal it functions more as an exception to the general rule of liability, requiring the director to prove diligence and loyalty. It is, therefore, a more demanding model that provides greater protection to societal and minority shareholder interests.

It can thus be concluded that the reception of the BJR into Portuguese law reflects a formal attempt to balance directors’ autonomy with managerial accountability. However, in practice, it results in a more restrictive regime than the American model, placing directors in a procedurally more vulnerable position.

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