New legal standards for trustee performance

Until recently, trustees who acted "in good faith" were not held personally liable for mistakes in judgment. But in two recent cases--Smith v. Van Gorkom and Hanson Trust PLC v. MLSCM Acquisition, Inc.--the courts found directors liable for making hasty, ill-informed decisions regarding ownership issues. The rulings said that when boards make major decisions, they must be able to demonstrate that they approved a fair transaction. They can do this by consulting with senior management and corporate counsel and, if needed, with independent authorities. Boards should obtain pertinent documents to review before making a decision and should have ample time to obtain necessary data. Meeting minutes should document these precautions. In their rulings, the courts did not second-guess the boards' business judgment. Rather, they found that the unprepared directors acted so quickly that they could not have made an intelligent decision. The rulings convey a commonsense message: Trustees who exercise authority without adequate information risk damaging the corporation and its services. As trustees attempt to fulfill their legal obligation to probe and question before approving major actions, tensions with management may arise. Boards and corporate officers, however, must find ways to reach corporate consensus on important decisions while maintaining an appropriate division of authority.