Distanet Corporation and Telenex Corporation are competitors in the gaming accessories market. Telenex has been the market leader for over five years. After examining the price and sales data of products from both companies and consulting an economist and an accountant, Distanet's directors vote for a reduction in price of Distanet's products. They believe that reducing prices would make the company more competitive. The decision to reduce prices does not improve sales significantly. In fact, Distanet's revenues decrease as a result of the decision. Aileen, a stockholder of Distanet, seeks to hold Distanet's directors liable for the failure of the plan to improve Distanet's position in the computer market and for the losses experienced by the corporation as a result of the implementation of the plan. Will she succeed in her suit?

Question

Quizplus · Accepted Answer

Under the given circumstances, Aileen cannot sue the directors because the directors' decision is subject to the business judgment rule. According to the business judgment rule, directors are not liable for mere errors of judgment when they act with care and good faith. In order to obtain the protection of the business judgment rule, the directors must meet three requirements in arriving at their decision: an informed decision; no conflict of interest; and rational basis.

Distanet Corporation and Telenex Corporation Are Competitors in the Gaming