Corporation Law: The Business Judgment Rule in Derivative Suits against Directors

Galef v. Alexander, 615 F.2d 51 (2d Cir. 1980). The shareholders derivative suit is the principal means available to minority shareholders to correct abuses committed by corporate management. Recent federal court decisions have limited the availability of this action through application of the “business judgment” rule. This rule provides corporate management with a shield to protect their actions concerning the business affairs of the corporation from judicial scrutiny. Applied to a derivative action, the rule operates as a bar to the shareholder’s suit, provided the directors seeking its application do not “stand in a dual relation that prevents an unprejudiced exercise of judgment.” Application of the business judgment rule was the crucial issue confronting the court in Galef v. Alexander. Resolution of this issue was further complicated when Galef alleged violations of both state law and the federal proxy requirements of the Securities Exchange Act of 1934. This note evaluates the Galef court’s application of the business judgment rule and the impact of the court’s decision on the policies underlying the business judgment rule, and section 14(a) of the Securities Exchange Act of 1934