Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 17

Henrichs v. Chugach Alaska Corp.
Supreme Court of Alaska, 250 P.3d 531 (2011).
government.westlaw.com/akcases
FACTS The board of Chugach Alaska Corporation (CAC, a corporation of Alaska Natives) split into two factions-one led by Sheri Buretta, who had chaired the board for several years, and the other by director Robert Henrichs. A coalition of directors voted to remove Buretta and install Henrichs as the board's chair. During his term, Henrichs held miniboard meetings and made decisions with only his supporters present. He refused to comply with bylaws that required a special meeting of shareholders in response to a shareholder petition. In addition, he acted without board discussion or approval and ignored board rules in the conduct of meetings. He also personally mistreated directors, shareholders, and employees, as well as retaliated against directors who challenged his decisions by excluding them from the board and spending corporate funds to file meritless complaints against them with state authorities. After six months, the board voted to reinstall Buretta. CAC filed a suit in an Alaska state court against Henrichs, alleging a breach of fiduciary duty. A jury found Henrichs liable, and the court banned him from serving on CAC's board for five years. Henrichs appealed, claiming under the business judgment rule, he could not be found liable unless he had been "grossly negligent."
ISSUE Does the business judgment rule protect Henrichs who acted in breach of his fiduciary duties?
DECISION No. The Alaska Supreme Court affirmed the lower court's decision. The business judgment rule did not protect Henrichs. A director or officer can be held liable for a breach of fiduciary duty without a finding of gross negligence.
REASON Henrichs contended that, under the business judgment rule, he could not be found liable unless he had been grossly negligent. The court agreed that the business judgment rule affords some protection for corporate directors, but added, "We have never measured the degree of protection afforded by the business judgment rule in terms of gross negligence." If there is evidence of bad faith, breach of a fiduciary duty, or acts in violation of public policy, the rule will not protect a director who makes bad business decisions from liability for those choices. The jury and the lower court had found that Henrichs committed a breach of fiduciary duty. The conduct was "volitional"-that is, Henrichs chose to act as he did and knew that his actions exceeded the rules. The misconduct was serious and egregious (outstandingly bad). In light of these findings, the business judgment rule did not protect Henrichs.
FOR CRITICAL ANALYSIS-Ethical Consideration Does misbehavior such as the conduct at the heart of this case constitute a breach of business ethics? Discuss.