An Examination of Company Law’s Deference to Directors’ Business Decisions: A New Perspective

Abstract

The UK judges defer to company directors’ certain type of business decision and thereby, insulate them from excessive standard of judicial scrutiny. However, the definition of the type of executive discretion that qualifies for company law deference has long been uncertain. The UK judges take the view that, as judges, they are ‘ill-equipped’ (similar to the term – ‘that judges are not business experts’ used by the US courts in justifying their common law-derived business judgment rule) to second-guess those decisions, without a clear explanation as to the precise meaning of the term. The lack of clarity leads to the long-standing misconceptions amongst the academics and the practitioners citing the judges’ insufficient business expertise as a reason. This thesis sets out to map the relevant law. It offers some meaningful insights into how company law deference functions, by reviewing the types of business decisions through psychology, and to a lesser extent, economics. Case studies are undertaken to give an in-depth illustration, from a psychology perspective, on the types of business decisions eligible for company law deference. This thesis gives a critical evaluation of the customary view questioning judges’ business expertise as a justification for courts’ deference. It submits that, in practice, the judges focus on the dichotomy between directors’ business creativity and corporate governance functions. Showing contrast between the so-called ‘programmed’ and ‘non-programmed’ decisions in the context of courts’ deference to executive discretion. It is this taxonomy that is both doctrinally and normatively dispositive to the courts’ approach. This thesis also submits that the law plays an important role in yielding appositive impact on motivation of company directors’ business creativity. This interdisciplinary research involving the relevant law, psychology and economics leads to a useful mechanism, capable of identifying or predicting the types of business decisions for the application of the courts’ deference.