Journal of Critical Reviews

ISSN- 2394-5125 Vol 7, Issue 5, 2020

Review Article

THE LAW ON BUSINESS JUDGMENT RULE IN MALAYSIA: A REVIEW

Nurli Yaacob1 & Asmah Laili Yeon2

School of Law, Universiti Utara Malaysia, 06010 Sintok, Kedah

Email: nurli@uum.edu.my, asmah485@uum.edu.my

Received: 25.01.2020 Revised: 27.02.2020 Accepted: 29.03.2020

Abstract
Directors are responsible for managing and directing the business and affairs of the company and often face difficult situations to decide.
Under the business judgment rule (BJR), the officers and directors of a company are immune from liability to the company for losses
incurred in corporate transactions within their authority, so long as the transactions are made for proper purpose and in good faith; no
material personal interest; is informed about subject matter; and for the best purpose of the company. The objectives of this paper is to
examine the law relating to BJR in Malaysia. In achieving the objectives, pure legal research which involved library research has been
conducted. Where necessary, special reference has also been made with the law in United States, Canada and Australia on the BJR. The
finding shows that the law regarding BJR in Malaysia has been provided in the Companies Act 2016 which is quite similar with the law in
Australia. This article concludes that four conditions as stated in section 214 of the Companies Act 2016 must be fulfilled by the directors
before BJR can be used to defend their decision making.

Keywords: directors, judgment, business judgment rule, BJR, Malaysia

© 2019 by Advance Scientific Research. This is an open-access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/)
DOI: http://dx.doi.org/10.31838/jcr.07.05.25

INTRODUCTION incurred in corporate transactions that are within their authority

Companies have two main organs namely board of directors and and power to make when sufficient evidence demonstrates that
members. One of the main principles of company law is the transactions were made in good faith. It means for the rule to
separation of powers between two main organs of the company. apply, there must be a ‘business judgment.’ According to section
Once the power had been given to the board of directors to run 214(2) of the Companies Act 2016, business judgment means any
the company, members cannot interfere as been decided in the decision on whether or not to take action in respect of a matter
case of John Shaw & Sons (Salford) Limited v Peter Shaw and John relevant to the business of the company. The matter on which the
Shaw [1935] 2 KB 113 (CA). In this case, a resolution of the decision was made must be relevant to the business of the
general meeting disapproving the commencement of an action by company. It is clear from this definition that there must be a
the directors was held to be a nullity. In order to perform their decision to do or not to do something and not about merely doing
responsibilities, directors are subject to several duties such as nothing (Ruzita & Adilah, 2012).
fiduciary; care, skill and diligence; and also statutory duties. This
can be supported by Buckingham (2016) where he said that Under the BJR, the officers and directors of a corporation are
directors are subject to several specific duties, which are sourced immune from liability to the corporation for losses incurred in
in the general law and statute which include: the duty to act in corporate transactions within their authority, so long as the
good faith; the duty to act for a proper purpose; the duty to avoid transactions are made in good faith and with reasonable skill and
conflicts of interest; the duty not to profit from their position; prudence. In the case of Yeoh Eng Kong v Dato’ Nik Ismail Bin Nik
and the duty to exercise care and diligence. However, according Yusoff & Ors [2016] MLJU 529, Mohd Nazlan Bin Mohd Ghazali JC
to Ricci & Miyairi (2016), directors’ duty of care set a very low stated that:
yardstick and was enforced leniently. “Business is a venture designed to reap rewards in terms of
The directors and officers of a corporation are responsible for profits. But such undertaking carries risks of losses and failures.
managing and directing the business and affairs of the Where such enterprise is undertaken by corporate entities, their
corporation. They often face difficult questions concerning boards of directors should rightfully thus be protected for
whether to acquire other businesses, sell assets, to expand into making erroneous business judgments which may also go
other areas of business, or issue stocks and dividends. They may horribly wrong provided the decision in question was arrived at
also face potential hostile takeovers by other businesses. To help honestly, responsibly and in any event for the best interest of the
directors and officers meet these challenges without fear of company. Investors must thus expect a risk of loss, as well as an
liability, courts have given substantial deference to the decisions expectancy of profits on the basis of the wisdom of business and
the directors and officers must make. This is called business management decisions.”
judgment rule (BJR). The High Level Finance Committee Report The above statement can also be supported by Velasco (2006)
on Corporate Governance realized that United States and and Miller & Rutledge (2005). According to Velasco (2006), one
Australia protect the directors of companies with BJR and of the most basic principles of corporate law is that the business
suggested it to be enacted as a statutory provision in Malaysia judgment rule provides directors with tremendous deference
(Sujata Balan, 2011). Eventually, in 2007, this BJR concept has and great protection against liability. The business judgment
been introduced in Malaysia under the Companies Act 1965. The rule, which originally existed as a common law standard, but is
concept of BJR was maintained in section 214 in the new now codified in part, is a standard of judicial review that protects
Companies Act 2016. BJR can be defined as a legal principle that the broad discretion conferred on a corporate board of directors
makes officers, directors, managers, and other agents of a from excessive judicial interference (Miller & Routledge, 2005).
corporation immune from liability to the corporation for loss

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 THE LAW ON BUSINESS JUDGMENT RULE IN MALAYSIA: A REVIEW

According to Miller & Routledge (2005), where the business in (2) a director of a company shall exercise reasonable care, skill
judgment rule applies, a director will not be held liable for a and diligence with the knowledge, skill and experience which
decision, "even one that is unreasonable" and results in a loss to may reasonably be expected of a director having the same
the corporation, so long as the director was not grossly negligent responsibilities; and any additional knowledge, skill and
in reaching the decision. Hasani, Aishah & Jady (2010), agreed experience which the director in fact has.
that a director’s business judgment serve as a defense for
directors who believe that they are acting in good faith based on The above section inter alia deals with the duty of director to
the sufficient information for the furtherance of the company’s exercise his or her power in good faith or to act honestly. Since
interests. the concept of BJR was recommended by the High Level Finance
Committee on Corporate Governance (HLFC) in 1999, HLFC also
The insertion of business judgment rule in the Malaysian recommended that the statutory duty to act honestly in section
Companies Act in the year of 2007 became as one of the ways to 132 of the Companies Act 1965 (which is equivalent to section
state the boundary in business decision making of the companies 213 of the Companies Act 2016) be reformulated to require a
top management. A director of company has the duty under the director to act bona fide in the best interest of the company
law to act with reasonable care, skill and diligence. The BJR (Report on Corporate Governance, 1999). However, this is
provides for the requirements a director will be deemed to have another legal issues of law in BJR because according to Hasani
fulfilled and this can be considered as a kind of relief for (2013), any attempt to codify the common law duty of director is
directors. The applicable law in Malaysia regarding BJR is in the facing difficulties. This can also be supported by Lumsden (2010)
Companies Act 2016 which effectively enforced by stages when he stated that in Australia also, over and above the
starting on 31st January 2017. Even though, the BJR concept has concerns about complex concepts like good faith and proper
been introduced more than a decade ago in Malaysia, but it still purpose, the mechanism of the defence was uncertain, i.e how
faces several problems. preconditions needed to be satisfied to attract the defence and
which party bore the onus of proof.
PROBLEM STATEMENT
The BJR has always been criticized as poorly developed rule. Another problem is regarding clashes of opinion in terms of
According to Plessis & Mathiopoulos (2016), the ‘common law recognition of BJR. According to Hasani (2013), in Malaysia at
business judgment rule’ in jurisdictions other than the United present, there is no form of the BJR being recognized positively
States is and always has been a poorly developed rule. In either through legislation or common law application. He also
Malaysia also, there are a few problems relating to the provisions added that Malaysia may consider a business judgment rule to be
on BJR. The first problem is regarding unclear law on BJR. For put in place statutorily. This is because at present, as highlighted
example, section 214 (1A) of the Companies Act 2016 provides above, Malaysian company law does not recognize the BJR
that a director who makes a business judgment is deemed to explicitly. The recognition of any kind of the concept is still
meet the requirements of the duty under subsection (1A), and unclear. On the other hand, this is inconsistent with Ruzita and
the equivalent duties under the common law and in equity if the Adilah (2012). Ruzita and Adilah (2012) states that even though
director makes the business judgment in good faith for ‘a proper the courts have demonstrated disinclination to review the merits
purpose’. The phrase ‘a proper purpose’ in the director’s of business judgments made by directors, but the courts’
common law fiduciary duty to act for the purpose for which their decisions in the recent cases have shown Malaysian courts
powers are conferred and not for other purpose is not clearly acknowledge the principle of BJR within the meaning of section
spelled out (Hasani, 2013) and duty to act for proper purpose 132 (1 B) of the Companies Act 1965. Zaharah, Zaiton & Mohd
may present another problem to directors (Hasani, Aishah & Bahrin (2013) also states that the Malaysian courts have
Jady, 2010). According to Hasani (2013), the courts may acknowledged the BJR as can be gleaned from the recent court’s
therefore interpret whether a director has acted honestly in what decision.
he or she believes to be for the benefit of the company and Furthermore, duty to act for proper purpose may present
exercising his/her power for the purpose for which the power is another problem for directors. A director might be acting
conferred. The courts may be inclined to think that directors' honestly in what he considers to be the company’s interest and
judgment should normally prevail as the court's stance is not to yet still be in breach of his fiduciary duty (Hasani, Aishah & Jady,
interfere with the commercial judgment of the company (Hasani, 2010). Case law guidance on this issue is quite unclear and the
2013). It may be argued that the uncertain position of the law on scope of purpose of a power is left for the court to determine. As
this issue may indirectly favour directors. The rule was actually usual the court will not interfere with their judgment in matters
aimed at alleviating fears that directors may have that their of management. This is because usually the BJR rule was
commercial decisions made in good faith and for the benefit of developed in recognition that "judges are not business experts
the company would be subject to second guessing by the courts qualified to evaluate complex commercial transactions." Thus,
through litigation alleging a breach of the duty of care and the rule precludes, or at least limits, the courts' interference with
diligence (Harris, J. & Hargovan, 2016). the decision-making policy of corporate management (Wagner at
According to Samsar Kamar (2007), there are a few comments on 109 as cited in Hasani, 2013). The court’s duty is to decide on
this BJR i.e the definition is not comprehensive as director is not which side of the line between proper use and abuse the case
protected if he has material personal interest in the subject falls (Hasani, Aishah & Jady, 2010). Ruzita & Adilah (2012) states
matter of business judgment and the ‘material personal interest’ that the courts have traditionally disliked substituting its
is not define in the Companies Act 1965 (now Companies Act judgment for the business and management decisions of
2016.) In addition to that, the word ‘reasonably believes’ also is company directors.
not defined although it exist in two of the conditions that
directors should have in BJR. Director can also rely on expert OBJECTIVES
advice, however the reliance would only be considered The objective of this article is to examine the law relating to
reasonable if the director had made an independent assessment business judgment rule in Malaysia.
of the reports, advice, opinions and data received from the
experts and consultants employed to provide them. RESEARCH METHODOLOGY
The methodology used in this article is pure legal research where
Furthermore, according to section 213 (1) of the Companies Act library based research has been conducted. Two types of data
2016, a director of a company shall at all times exercise his namely primary and secondary data were used in this article.
powers in accordance with this Act, for a proper purpose and in Primary data consist of acts and cases while secondary data
good faith in the best interest of the company. Further, it is stated consist of textbooks and journal articles. Data was gathered from

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 THE LAW ON BUSINESS JUDGMENT RULE IN MALAYSIA: A REVIEW

Sultanah Bahiyah Library especially through online database. absence of good faith (Ruzita & Adilah, 2012). It has been
Data has been analysed using content analysis. Where necessary, mentioned that the ‘proper purpose’ doctrine requires all
reference has also been made with the laws in United States, company power to be exercised for the purpose for which it was
Canada and Australia on the BJR. originally conferred (Greenhow, 1999). It is argued that there is a
general duty under s.132 (1) for a director to exercise his powers
for a proper purpose and it means “there are decisions of the
FINDINGS court to define what is a proper purpose” (Aiman Nariman et.al,
The law on BJR in Malaysia is provided in the Companies Act 2008). According to Lumsden (2010), a decision made in good
2016. According to section 213 (1) of the Companies Act 2016, a faith and for a proper purpose means a decision made with an
director of a company shall at all times exercise his powers in honest regard for the obligation of the manager to be loyal to the
accordance with the act for a proper purpose and in good faith in company. It does not include a decision that is made in the
the best interest of the company. Further it is stated in (2) that a interests of someone other than the company.
director of a company shall exercise reasonable care, skill and
diligence with the knowledge, skill and experience which may In the case of Tengku Dato’ Ibrahim Petra bin Tengku Indra Petra
reasonably be expected of a director having the same v Petra Perdana Bhd and Another Appeal (2018) 2 MLJ 177, the
responsibilities; and any additional knowledge, skill and Federal Court allow the appeal by the defendants with costs. In
experience which the director in fact has. Sub section (3) of the result, the orders of the Court of Appeal are set aside and
section 213 states that a director who contravenes this section hereby reinstate the order of the learned High Court judge. The
commits an offence and shall, on conviction, be liable to Court of Appeal mistakenly considered as a breach by the
imprisonment for a term not exceeding five years or to a fine not directors under section 132(1) in the event that the decision of
exceeding three million ringgit or to both. the board of directors was inconsistent with the wishes of
shareholders. It was held that if there was difference of opinion
The concept of BJR has been further elaborated in section 214. between shareholders then the views of the majority might be
According to section 214(1) of the Companies Act 2016, a taken to represent what was best for the company. In this case,
director who makes a business judgment is deemed to meet the there was clearly no evidence that as directors of the plaintiff, the
requirements of the duty under subsection 213(2) and the defendants had acted in breach of their duties to the plaintiff.
equivalent duties under the common law and in equity if the What the defendants in the present case did was for a proper
director: purpose and in good faith in the best interest of the plaintiff.
(a) makes the business judgment for a proper purpose and in The same scenario also occured in the case of 3 Two Square Sdn
good faith; Bhd v Perbadanan Pengurusan 3 Two Square & Ors [2018] MLJU
(b) does not have a material personal interest in the subject 111. In this case, the plaintiff sought a mandatory injunction to
matter of the business judgment; compel the Management Corporation to maintain such property
(c) is informed about the subject matter of the business on the basis that they are common property of 3 Two Square Sdn
judgment to the extent the director reasonably believes to Bhd. Azizul Azmi Adnan J said that the business judgment
be appropriate under the circumstances; and rule will protect the Council Members if it can be established that
(d) reasonably believes that the business judgment is in the best they have acted ‘in good faith’ taking into account all the factors
interest of the company. that surrounds the matter and that they personally believed the
decision arrived at is in the best interest of the condominium
Business judgment in this context means any decision on owners and the Management Corporation, as a whole. Azizul
whether or not to take action in respect of a matter relevant to Azmi Adnan J in this case also referred to the case of Re Steel and
the business of the company. This has been provided by (2) of the Conveyancing (Strata Titles) Act 1961 (1968) 88 WN Pt 1
section 214. It is clear that in order for a director to use this 467, where the Supreme Court of New South Wales suggested
defense, he or she must ensure that all the above four that council member was an owners corporation might even
requirements has been fulfilled. According to Aiman Nariman & have a higher duty than company directors.
Effendy (2018), directors will not be necessarily liable even if the
company suffered loss if they had made the decision in This BJR recognizes that the court do not review the merits of
accordance with the business judgment rule (BJR). This is business judgment made by directors and do not substitute their
supported by the case of Yeoh Eng Kong v Dato’ Nik Ismail Bin Nik own business judgment for that of the directors. This rule has
Yusoff & Ors [2016] MLJU 529. In this case, Mohd Nazlan Bin been decided in the case of Howard Smith Ltd v Ampol Petroleum
Mohd Ghazali JC stated that a director who makes a business Ltd (1974) AC 821. In this case, there was a challenge to the
judgment is deemed to meet the requirements of the duty under validity of an issue of shares by the directors of a company. Since
subsection 213(2) and the equivalent duties under the common the directors’ primary object for the allotment of shares was to
law and in equity if the director meets the said four conditions. It alter the majority shareholding, the directors had improperly
is clear that there are four conditions of BJR that must be exercised their powers and the allotment was invalid. The
observed by directors as stated in section 214(1) above. Singapore High Court in Vita Health Laboratories Pte Ltd and
others v Pang Seng Meng [2004] 4 SLR 162 also upheld the rule
Firstly, director must make the business judgment in good faith that a court will not substitute their own judgment for that of
for a proper purpose and must make the decision in good faith. directors, especially with the benefit of hindsight. This rule was
The court will prima facie presume that the directors have acted also been illustrated in Intraco Ltd v Multi-Pak Singapore Pte Ltd.
in good faith. Those who allege directors have exercised their [1995] 1 SLR 313. In this Singapore case, the court gave great
powers improperly must give evidence to that effect. It is weight to the commercial context and benefit of the transaction.
contrary to the principle of justice to presume that the directors The business decision may have been a poor management
have done wrong. This is among the principles in the case of decision but was arrived at in good faith. Miller & Routledge,
Mohan a/l Paramsivam v Sepang Omnibus Co Sdn Bhd [1989] 1 (2005) also supported this rule by saying that if a board had
MLJ 247. The presumption of good faith is rebuttable. It is also exercised a minimum level of care, typically satisfied by
usually displaced in circumstances where self- interests of reference to the procedures utilized in arriving at its decision,
directors are involved; where there is absence or lack of then courts would not second-guess the merits of that decision.
independent judgment; or where it is obvious that the interest of According to them also, it is important to note the difference
other person were put before the company’s interest (Loh Siew between the standard of care, which is the standard of conduct
Cheang, 2002). Directors are allowed to rely on the business expected of directors in their decision making, and the business
judgment rule when judgment was exercised without the

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 THE LAW ON BUSINESS JUDGMENT RULE IN MALAYSIA: A REVIEW

judgment rule, which is the standard of review that determines affect the shareholders, ‘interests of the company’ may mean the
whether directors will be held liable for a poor decision. interest of the shareholders as a general body. When the
company is or is prospectively insolvent, it may mean in the
Secondly, director does not have a material personal interest in primary sense, the interest of the creditor.
the subject matter of the business judgment. Personal interest
may be in the form advantages, whether tangible or intangible to Hasani (2013) also stated that BJR’s recognition is implied from
the directors involved. An interest means an interest that the courts are not to interfere with the commercial wisdom
(determined objectively) that has the potential to colour the of a particular decision made by the board. In the case of Re
judgment of a manager (Lumsden, 2010). The word ‘material’ Smith & Fawcett Ltd [1942] Ch. 34, Lord Green pointed out that
suggests that if a conflict of interest is present, then it must relate directors must exercise their discretion bona fide in what they
to more than an immaterial or insignificant interest (Greenhow, consider is in the interests of a company and not what a court
1999). The director must not have any material interest in the may consider. However, this presumption may be rebutted in
subject matter. A director only enjoys the protection of the many ways. The court may be invited to judge director’s bona
business judgment rule if he does not have a “material” personal fide which may be made objectively by employing the test of a
interest in the subject-matter of the business judgment but there hypothetical director, in that "whether an intelligent and honest
is ambiguity as to when an interest will be “material”. This man in the position of a director of the company concerned
conflict of interest rule has been further elaborated under section could, in the whole of the existing circumstances, have
218(1)(a) until section 218(1)(e) of the Companies Act 2016. reasonably believed that the transactions were for the benefit of
the company." This rule has been decided by Pennycuick J in the
The third condition is reasonably informed. The requirement case of Charterbridge Corp. Ltd v. Lloyds Bank Ltd & Anor [1970] 1
that the director must inform himself ‘to the extent they Ch 62.
reasonably believe to be appropriate’ means it relates to the
decision making occasion, rather than the general state of In Malaysia, the High Court in Mohd Shuaib Ishak v Celcom
knowledge of the director. It requires the director to become (Malaysia) Berhad [2011], had said that the rule was inapplicable
informed about the subject matter of the decision prior to and that it has the discretion to interfere with the decision of the
making it. According to Lumsden (2010), the business judgment management in this case. However, on appeal in Celcom
defence does not require a consideration of what the manager (Malaysia) Bhd v Mohd Shuaib Ishak [2011], the court decided
should have known. It is an objective question of whether they that the decision of a Committee of Independent Directors was an
have satisfied the standard not what they might have known in exercise of the prudent business judgment rule by a completely
another level of inquiry. The retention of qualified experts, honest and disinterested section based on independent legal
reasonable reliance on the experts’ advice and the adoption of a advice. In the Malaysian case of Mega Education Systems Sdn Bhd
systematic approach to the matter will generally help & Anor v Ozone Glass Design Sdn Bhd & Ors (2011), the High Court
substantiate that reasonable steps were taken to inform also showed its refusal in interfering with the company
themselves are among situations whereby the manager can directors‟ wisdom on business and management decisions. The
establish that they have informed themselves to the requisite court had said, “when hard-nosed businessmen enter into an
extent (Lumsden, 2010). In the case of Australian Securities and investment opportunity, they have to expect a risk of loss, as well
Investments Commission v Rich [2009] NSWSC 1229, it was stated as an expectancy of profits. The court cannot be expected to
that the phrase ‘‘to the extent they reasonably believe to be provide an exit mechanism for them when an investment turns
appropriate’ convey the idea that protection may be available sour. As is sometimes said, the court cannot be expected to
even if the director was not aware of the available information conduct a judicial review of business judgments.” The courts do
material to the decision, if he reasonably believed that he has not want to superimpose their views on the directors’ business
taken appropriate steps on the decision making occasion to judgment (Sujata Balan, 2008).
inform himself about the subject matter. It has been pointed out
that this requirement is fundamental to the duty of care and the In Australia, balancing directors’ accountability for due care and
question of exactly how much information is required depends the promotion of entrepreneurial decision-making remains
on the nature of the decision, including the subject matter and central in corporate governance (Ricci & Miyairi, 2016). This is
complexity (Greenhow, 1999). the reason for the introduction of BJR in Australia in 2001. The
rule had two express purposes: first, to clarify and confirm the
The final condition is reasonably believes that the business existing general law standard of review; and second, to safeguard
judgment is in the best interests of the company. A director must directors’ authority to make honest, informed and rational
also reasonably believe that the business judgment is in the best business decisions and thereby encourage enterprise (Ricci &
interest of the company. A rational belief is no more than a belief Miyairi, 2016). Section 180 (2) of the Corporation Act 2001
supported by an arguable reasoning process (Lumsden, 2010). provides that a director or other officer of a corporation who
The phrase ‘interests of the company’ could means several things makes a business judgment is taken to meet the requirements of
depending on the factual circumstances. Dixon J in Mills v Mills subsection (1), and their equivalent duties at common law and in
(1938) 60 CLR stated that ‘best interest of the company’ and not equity, in respect of the judgment if they make the judgment in
for ‘some private advantage or any purpose foreign to the good faith for a proper purpose; do not have a material personal
power’. The directors are also required to exercise their powers interest in the subject matter of the judgment; inform themselves
honestly in what they believe, and not what a court may about the subject matter of the judgment to the extent they
consider. This is supported by Lord Greene MR in Re Smith & reasonably believe to be appropriate; and rationally believe that
Fawcett Ltd [1942] Ch 304 when he said that the directors must the judgment is in the best interests of the corporation. The
exercise their discretion bona fide in what they consider — not provisions of BJR in Australia are quite similar with Malaysian
what a court may consider—is in the interests of the company, provisions because the concept of BJR in Malaysia was modeled
and not for any collateral purpose. According to Loh Siew Cheang from s 180(2) of the Australian Corporations Act 2001.
(2002), directors would not be acting in the interest of the According to Ruzita & Adilah (2012), in both Australia and
company where, for example, they divert corporate Malaysia there has to be a business judgment, i.e. whether or not
opportunities available to the company towards themselves or to take action in respect of a matter relevant to the business of
their friends; make secret profit for themselves or others; expose the company. Both jurisdictions use the same term regarding any
the company to liabilities to secure their personal interests; or decision on “proper purpose” and “material personal interest.”
prefer or advance the interests of third parties over the However, the BJR in Australia is also applicable to officers not
company’s interests. Where there is conflict between the just directors like Malaysia.
majority and minority shareholders or where the decision will

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In Australia, there are few procedures that must be fulfilled in in the sale of securities by dealing with only one investment
order to apply this BJR as a defence to director’s decision. house and by generally neglecting to "shop around" for the best
According to Ricci & Miyari (2016), Austin J in Australian possible price, resulting in a loss of nearly half a million dollars.
Securities and Investments Commission v Rich (2009) 236 FLR 1 The Federal District court ruled that although the directors had
also clarified the procedure for applying the statutory defence. choosen the wrong course of action, they acted in good faith and
First, the court must assess whether the relevant circumstances therefore were not liable to the shareholders. The court reasoned
could amount to a breach of the duty of care according to that "mistakes or errors in the exercise of honest business
whether the action or inaction is unreasonable in the sense of judgment do not subject the officers and directors to liability for
being more than a ‘mere error of judgment’. If the court finds the negligence in the discharge of their appointed duties."
relevant action or inaction to be unreasonable, it must then ask
whether the director/s made a ‘business judgment’ as defined in Subsequently, the business judgment rule was applied to
s 180(3) Australian Corporation Act 2001. Finally, the court must directors' actions when corporations were faced with a hostile
consider whether the directors satisfy each of the four takeover. In Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946
preconditions in s 180(2)(a)–(d) Australian Corporation Act (Del. Super. 1985), the Delaware Supreme Court upheld the
2001 (Ricci & Miyairi, 2016). As a conclusion, the Court defensive actions taken by a board of directors during a takeover
establishes the usefulness of the business judgment defence to struggle with a minority shareholder. In this case, Mesa
those managers that act in good faith and with due care. Petroleum Company made an offer that would have made it the
majority shareholder in Unocal Corporation. Under the offer,
According to the law in Australia, BJR has been introduced to shareholders who sold their Unocal stock would receive $54 a
help directors in making decision on behalf of the company. share until Mesa acquired the 37 percent it sought and then
Farrar (2011), indicates that there are five policy bases of BJR would receive highly speculative Mesa securities instead of cash
namely it is a judicial concern that normal persons of intellect, for any stock sold beyond that 37 percent. To counteract the
reason and integrity would not become directors if the law takeover bid Unocal's directors announced that if Mesa obtained
requires from them a high liability that is not possessed by 51 percent of its shares, Unocal would purchase the remaining 49
persons with ordinary knowledge. A qualified person would not percent for an exchange of debt securities (securities reflected as
want to be directors if every of their decisions can be questions; debt on the books of the corporation) with an aggregate par (or
as an encouragement of informed risk taking in the corporate face) value of $72 a share, but the offer would not be extended to
enterprise world especially in increasing global economy; courts the 51 percent of stock held by Mesa. Mesa filed suit, alleging that
are still not prepared to examine and exhume business decisions. the directors had violated their fiduciary duty by excluding Mesa
Directors make decisions based on intangibles and incomplete from the exchange. The court concluded that the directors'
information such as intuition, experience and general actions were protected by the business judgment rule. The court
consideration regarding such items as competitive outlook and recognized that in responding to hostile takeover bids, the
consumer preferences. Even if courts can accumulate all directors of a corporation can face a conflict between their own
sufficient data before them, still most courts would feel difficult interests and the interests of the corporation and its
to re-evaluate the data; it is an established judicial policy to leave shareholders. The court stated that the Unocal directors had
managements to directors and reluctant to make second guess reasonable grounds to believe that a danger to the corporation
business decision; and BJR is a tool courts use to cut off existed because of Mesa's actions and that the defensive actions
unmeritorious but complex cases at their motion or other pre- they took were reasonable in relation to the threat they
trial stage. It is a standard judicial review used as a device to "rationally and reasonably" believed the offer posed.
achieve judicial economy.
CONCLUSION
In other jurisdiction such as United Kingdom (UK), its Companies One of the major factors that contribute towards the stability of
Act 2006 also provides the duty to promote the success of the any nation’s economy is the drive and efficiency of companies
company. According to section 172(1) of the Companies Act that are steered by capable board of directors. A company, being
2006, a director of a company must act in the way he considers, an artificial entity, is managed by directors who are appointed by
in good faith, would be most likely to promote the success of the the members of the company in the general meeting. Directors
company for the benefit of its members as a whole, and in doing are accountable for their exercise of their powers in managing
so have regard to: likely consequences of any decision in the corporate assets. The directors’ duties of care exist in equity,
long-term; interests of the company’s employees; the need to common law and statute. The directors duties are stated in
foster the company’s business relationships with customers, section 213 of the Companies Act 2016 which provides that a
suppliers and others; the impact of the company’s operations on director shall at all times exercise his power for a proper purpose
the community and the environment; the desirability of the and in good faith in the best interest of the company. A director
company maintaining a reputation for high standards of business also shall exercise reasonable care, skill and diligence with the
conduct; and the need to act fairly as between members of the knowledge, skill and experience which may reasonably be
company. Therefore, it is crucial to the directors in UK to exercise expected of a director having the same responsibilities; and any
due diligence and maintain their highest integrity in making additional knowledge, skill and experience which the director in
decision for the business under their management. fact has. The duties of care in Malaysia are subject to statutory
Meanwhile, the provision of BJR in the United States (US) is BJR. It is unavoidable for directors of business companies to
founded on Para 4.01(a) Part IV, the American Law Institutes make business judgment that involve risk taking. In this regard,
(ALI) Principles of Corporate Governance and Structure which the application of BJR among directors is a paramount important
provides: “A director or officer who makes a business judgment in order to avoid mismanagement of companies.
in good faith fulfils the duty under this section if the director or The rule affords protection for directors from liability where they
officer (1) is not interested in the subject matter of business have acted in good faith, with due care, and not exceeding their
judgment; (2) is informed with respect to the subject of business authority. This rule evolved to find a balance between greater
judgment to the extent which the director or officer reasonably accountability and search for economic efficiency. This rule
believes to be appropriate under the circumstances; and (3) prevents the courts from questioning the merits of honestly
rationally believes that the business judgment is in the best made business judgments by directors, who had after reasonable
interests of the corporation. In the USA, the BJR rule originated in investigation, in good faith without personal interest, reasonably
the case of Otis & Co. v. Pennsylvania R. Co., 61 F. Supp. 905 (D.C. believe that they are acting for the company’s benefit. Giraldo
Pa. 1945). In this case, a shareholder's derivative action alleged (2006) explained that there are two reasons for the necessity of a
that corporate directors failed to obtain the best price available business judgment plan; first, being the inadequacy or

Journal of critical reviews 155

 THE LAW ON BUSINESS JUDGMENT RULE IN MALAYSIA: A REVIEW

incapability of the courts to review business decisions; and decisions by company directors?, Proceedings of the 2nd
second, the absence of an objective standard by which the International Conference on Management. Langkawi.
correctness of the corporate decision may be measured. 17. Samsar Kamar Abdul Latif, (2007). The new statutory
duties and liabilities of directors under the recent
The objective of BJR is to safeguard a director who makes a Companies (Amendment) Act 2007. Malayan Law Journal, 5,
business judgment that is deemed to meet the requirements 318.
under section 214(1) of the Companies Act 2016 that are: it is 18. Sujata Balan. (2008). Reform of the law relating to
make in good faith for proper purpose; directors have no directors’ duties in Malaysia, AFBE Conference 2008, 3-4
material personal interest in the subject matter of business December 2008, Kuala Lumpur also available at
judgment; director is notify about the subject matter of business http://www.segi.edu.my/onlinereview/chapters/vol14_srl
judgment to the extent the director reasonably believes it would _art1.pdf 1 May 2012
be appropriate under the circumstances; and lastly reasonably 19. Velasco, J. (2006). The fundamental rights of the
believes the business judgment is in the best interest of the shareholder. U.C. Davis Law Review , (40) 2, 407-467.
company. All these four conditions must be fulfilled by the 20. Zaharah Elias, Zaiton Hamin & Mohd Bahrin Othman
directors before using this BJR. (2013). Business judgment rule: director’s saviour from the
legal quagmire. Proceedings of the 5th International
ACKNOWLEDGEMENT Conference on Financial Criminology.
The authors would like to thank the Ministry of Education for
awarding the FRGS grant with S/O Code 14386 entitled
‘Formulation of Business Judgement Rule Integrity Model of
Government Link Investment Companies.’

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