The Business Judgment Rule Self-Quiz








Eric has been the line manager for a major business unit of Exo, Inc for the past thirty years. His regular duties are to supervise the work of over 200 exmployees, hire and fire employees that work for his line, and make decisions about the proper schedule and maintenance of the line to ensure its optimal performance. One day, after a major breakdown in his line, Eric calls up a machinery manufacturer and hires them to replace and retool the machines in his production area. If, subsequently, the machinery manufacturer is not paid and sues the company, the company will likely:
Choice 1 Be liable for the cost of the machinery because Eric is an officer of the firm
Choice 2 Not be liable for the cost of the machinery because Eric is not an officer of the firm
Choice 3 Not be liable unless the machinery company installed the machines properly and Exo's board complimented Eric for his good work
Choice 4 Be liable, but only to the extent of value of the machines installed compared to those that were replaced
Going Co. recently engaged in a major acquisition of one of its competitors. However, it quickly turned out that the market was not prepared for the transaction and subsequently, the value of Going’s stock plummeted. Going’s directors had considered the possibility of such a situation, but determined it was an unlikely scenario. Subsequently, the board was sued by a shareholder for the loss of the company’s value. In their defense, the board will likely claim the protection of:
Choice 1 The Good Faith in Management Rule
Choice 2 The Business Judgment Rule
Choice 3 The Duty of Care
Choice 4 The Ordinary Prudence Standard
The board of EmpCo, Inc. recently agreed to enter a binding fifty year contract with one of its suppliers. However, the board failed to investigate the long term of the contract, its exceedingly high price, or the fact that the contract gave the supplier significant power over EmpCo’s operations. The board had simply acted on a recommendation of the supplier that it was offering the best deal around. If the board is subsequently sued by a shareholder, that shareholder will claim that the board failed to exercise:
Choice 1 Perfect Judgment
Choice 2 Due Care
Choice 3 Due Diligence
Choice 4 Financial Literacy
Hilary, Lisa, and Joy are directors of NewInc Co. For the past fifteen years, NewInc. Co. has done well in the business of producing kitchen goods. On a whim, and without doing any research or having any knowledge in the area, the board decides to enter into the production of portable DVD players. After trying to start the DVD business and spending millions of dollars to that end, the company fails. If the board is later sued by shareholders for the loss, they will likely be viewed by the courts as having:
Choice 1 Violated the Duty of Care
Choice 2 Violated the Entire Fairness Standard
Choice 3 Acted with Reckless Intent
Choice 4 Exceeded the Scope of the BJR

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