Atkins Imports Business Judgment Rule Into SEC's World

In his recent speech defending the springloading of options grants, SEC Commissioner Paul Atkins invokes the business judgment rule no less than six times. It is rare for an SEC official to invoke or even mention the judicially created business judgment rule which, at the end of the day, is quintessentially a creature of state law. While in the wake of Sarbanes-Oxley we have certainly moved closer to a federal corporate law, the business judgment rule has not yet become part of the SEC's lexicon. Springloading has been defined as a practice under which a company purposefully schedules an option grant ahead of good news or postpones the grant until after bad news. The commissioner posits that the decision to grant the options is one protected by the business judgment rule and should not be second-guessed. He goes on to warn that SEC enforcement actions in the options area could undercut the business judgment rule. This may be a position of first impression.

The business judgment rule is ancient and essentially bars judicial inquiry (and now possibly SEC inquiry) into the actions taken by corporate officers and directors in good faith and in the honest pursuit of the legitimate purposes of the company. The rule is informed by a deep respect for all good faith board of directors decisions. Once the rule is properly invoked, it presents a formidable barrier to any inquiry into the decisions taken by the board. The remarks by Commissioner Atkins are extraordinary and even historic in that they marry the business judgment rule to SEC decisions to seek an enforcement action. The rule was created by the courts on the bedrock principle of judicial reluctance to substitute a court's judgment for that of the board. Importing the business judgement rule into the SEC's enforcement process may involve the Commission in deciding whether a board's action had a good faith rational business purpose. That would be an historic first.