Contractual Limitations on the Business Judgment Rule

A recent case, Scheenstra v. Califontia Dairies, Inc. (2013) 213 Cal.App.4th 370 found a board of directors exceeded their discretion when they adopted a quota program in breach of their contractual obligations to one of its members. The members appealed claiming that the business judgment rule insulated them from liability for the good faith decisions of its directors in the exercise of business judgment. The Court of Appeals affirmed the judgment, explaining that the business judgment rule does not give the board discretion to rewrite its contracts. Because the Board's action breached its contract with its member, the business judgment rule did not apply. If you anticipate any corporate action that may potentially conflict with contractual obligations, let us know so we can help you through these dangerous waters.