In today’s society everyone is trying to turn their dollar into a million by investing into companies that seem prosperous—companies with upside that you can trust. These harsh economic times have taught us that no company is indestructible and we must be more vigilant in how we invest. The lessons from the 2008 financial meltdown, and the glimmers of residual headlines that continue, make it clear that understanding the corporate leadership philosophy and organic behaviors of a company is essential to being a strong steward of your money and investments. On any given day, you may need to ask “what do you really know about corporate law and how these companies are managed?”
Corporate law is very complex but at the heart of corporate law and governance is the business judgment rule. This rule is a legal presumption that provides the decisions of a director or officer are not subject to challenge nor breached their duty of care if two conditions are met:
- Director or officer of a company is disinterested,
- Director or officer has acted on an informed basis, in good faith, and with an honest belief that the action taken was in the best interests of the company.
So how does this rule affect you? It means that directors’ decisions will not be challenged once they acted in good faith even if the company loses money and the shareholders stock value decreases. In order for a shareholder to succeed in a case against a director, the shareholder must overcome the business judgment rule and be compensated for any loss suffered. They must rebut the business judgment rule as a shareholder plaintiff has the burden of demonstrating that a director breached the duty of good faith, duty of loyalty, or duty of care. This rule is the Achilles heel of many shareholders existence because of its unjust consequences as it is very difficult to rebut this presumption.
So what does this mean for investment? It means understand more than you would have in the past about the company, and whether it fits with your goals, has a track record– whether its names you know–Facebook, Microsoft—and those you don’t. For example, Asian Indians are one of the emerging talent pools being recruited to work in diverse industries. In the U.S, one third of the Asian Indian population is employed in the computer science and engineering sector. Another one third is employed in the business and sales sector; and 1 out of 7 people in Silicon Valley is Asian Indian. Does the company that you are reviewing for investment have that talent reservoir or are they positioned to attract that talent placing them in a position for impact? Is the company operating within their bylaws?
An attorney consult is an invaluable resource in evaluating the operations of a company before making the investment.
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