Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Humility. It is not a quality the public associates with judges and, at least on the surface, the public hardly seems mistaken. A judge enters a courtroom, is announced by a guard (or clerk or bailiff), and everyone stands to attention. Sitting before the judge does poses a risk of being held in contempt. When the judge sits, he sits on a throne which our republican heritage has rechristened a bench, although there is no bench in sight. And, of course, the judge does not wear a jacket and tie, let alone business casual, but rather a black robe barely distinguishable from a cassock, the attire of the ordained. On television, our judges are no-nonsense-I-am-in-charge-here types named Wapner or Judy, and any judge who lets the lawyers run the courtroom invites our contempt for having been Ito-ized. In real life, our judges can split software companies in two or have Presidents investigated by bar association committees for having been too cagey in testimony under oath about what is or isn’t sex. While a President’s power may be, as Harvard Professor Richard Neustadt has observed, the power to persuade, a judge simply enters orders, and woe betide those whose compliance is begrudging or worse. All things considered, then, the public may be forgiven for not associating humility with the judiciary. In fact, things are not quite what they seem. More than most professionals, judges know what they don’t know, are reasonably sensitive to the loss of legitimacy which follows from overreaching, and are acutely mindful of the fact that other judges exist to hear appeals and correct errors, sometimes in none too charitable ways and almost always in entirely public ones. To stay out of trouble, judges have fashioned a myriad of rules to keep them from deciding things which possibly are beyond their ken. Federal judges, in particular, are pretty careful to avoid deciding novel questions of state law for fear of getting it wrong or, for that matter, doing much of anything to interfere with an ongoing state court proceeding. This kind of modesty is variously called federalism, comity, or abstention. Whatever name it gets, its purpose is to show that the federal bench is generally not uppity where the state bench is concerned. A parallel modesty true of both state and federal judges is the deference which they show to state and federal regulatory agencies. A court is almost always slow to overturn what some power commission, say, has established as a reasonable charge for electricity per kilowatt hour. “Committed to agency discretion” is as emblazoned on the judicial soul as “decency forbids” is on the Victorian one. But the greatest restraint of all, the most resounding declaration of judicial humility, is known as the business judgment rule, pursuant to which judges routinely decline to second-guess business decisions made by corporate boards of directors, assuming certain critical conditions are met. Almost every state has a business judgment rule, and Massachusetts is no exception, having had such a rule since at least the nineteenth century. But last month, the Commonwealth’s highest court issued the Commonwealth’s clearest, most direct statement of the rule yet. The facts of Harhen v. Brown are these: John Hancock, the insurance company, employed a lobbyist named William Sawyer. He socialized with legislators and sometimes picked up the tab in alleged violation of the state’s ethics laws. He was criminally charged by federal prosecutors for depriving the public of “the services of an honest legislature”. Sawyer went to trial, through an appeal, and back to the trial court before a federal judge finally denounced the prosecution as “a threat to liberty” and then voided Sawyer’s conviction altogether. Hancock, as Sawyer’s employer, chose not to go through the ordeal which Sawyer had endured, but instead paid fines to both federal and state regulators. In April, 1996, one Loretta Harhen, claiming to be a policyholder, sent the Hancock board of directors a demand letter insisting that Hancock sue Hancock’s top managers and Sawyer for the expense and fines that Sawyer’s conduct had caused Hancock to incur. The board considered Harhen’s demands, the managers absented themselves from the board’s discussion, and the board referred her letter for such action as was appropriate to two independent directors, Mac Booth, the former chairman of Polaroid, and Larry Fish, the head of Citizens Bank. After careful review, these two directors notified Harhen in writing that her demand was rejected. Harhen sued, and Hancock asked the judge to dismiss the case, summarily saying that the business judgment of the two unarguably independent directors of an unarguably independent board was conclusive on the question of whether to sue a company’s management. The judge agreed, writing, “A court is ill-equipped to burst into the board room and make decisions as to what action should be taken in the best interest of the company.” Harhen appealed, and the appeals court sided with her, apparently believing that the letter by Booth and Fish rejecting her demand was too curt and that the business judgment rule was somehow unavailable to protect the committee’s decision or the board’s. The case then went to the Supreme Judicial Court, which resoundingly affirmed the trial court and went on to say that the appeals court had misunderstood “the last 100 years” of case law. For anybody charged with the governance of a corporation organized under Massachusetts law, Justice Roderick Ireland’s decision for a unanimous court merits close study. The central lesson of that decision is that every corporate board of every Massachusetts corporation should be comprised of a majority of disinterested directors. Disinterested is pretty much synonymous with independent. The heart of the matter is that an independent director doesn’t make her living from the company on whose board she sits and doesn’t have other disabling commercial or social ties either to the company or to its management. Put differently, an independent director really and truly can exercise independent judgment as to the affairs of the corporation. The benefit of an independent majority is simple. Massachusetts law, especially after the Harhen decision, will accord that independent majority a presumption that it acted in good faith and in an informed manner when it made whatever decision it made which the plaintiff now challenges. A presumption is just that, and all presumptions are, in the nature of things, rebuttable. But for a plaintiff’s suit to survive a motion to dismiss, it must contain very specific allegations to show that these independent directors really weren’t acting in good faith and in an informed manner. The burden is a heavy one; the plaintiff in Harhen couldn’t sustain it, and most plaintiffs won’t be able to either. The idea of an independent board is not naturally embraced by all managers who would prefer to issue self-executing commands without risk of second-guessing by directors who think it is their job to direct. Even more recalcitrant are the owners and managers of family businesses for whom consanguinity is the only measure of who gets a seat in the boardroom. We don’t know how to argue with those who embrace autocracy or somehow believe that being somebody’s nephew carries with it a guarantee of business acumen. We are only lawyers vocationally wedded to process, and the only process the law recognizes to yield the benefit of the business judgment rule is a board process dominated by independent directors. Finally, as lawyers, we also believe in full disclosure, and full disclosure reveals that we have long represented Hancock — and are proud to have done so.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.