Protecting Business Decisions: Deference to the Discretionary Judgment of Administrators and How It Has Been Applied by the Superintendence of Companies

The National Government, through the issuance of Decree 046 of 2024 (hereinafter, “Decree 046”), has elevated the rule of discretionary business judgment (Business Judgment Rule) to a legal standard. This rule protects administrators by allowing them to make business decisions without the threat of legal actions that could lead to personal financial liability for legal representatives, liquidators, board members, and other administrators, in the event of an adverse outcome from those decisions, provided that the decision was made in good faith, without conflict of interest, and with sufficient information at the time the decision was made.

The regulation under analysis states the following:

“In accordance with the duty to act with the diligence of a good business person, as outlined in Article 23 of Law 222 of 1995, authorities will respect the judgment adopted by administrators in making business decisions, as it will be understood that such decisions were made in good faith and in the best interest of the company, based on sufficiently informed judgment. This is unless there are cases of bad faith, overstepping of functions, breach or violation of the law or bylaws, violation of the duty of loyalty, or when the decision is manifestly ill-informed.”

Why Is This Important?

This approach aims to prevent administrative paralysis caused by fear of litigation, allowing administrators to take business risks without the obligation to ensure successful outcomes. One of the main benefits of this rule is that it can exempt administrators from liability for the decisions made.

When Does This Rule Protect Administrators?

The Business Judgment Rule protects administrators when they:

• Act in good faith
• Act in the absence of a conflict of interest
• Make decisions with due diligence and sufficient information
• Act within their functions and in compliance with the law and bylaws

Based on the above, it is essential for administrators to ensure that sensitive or risky decisions are well-documented to demonstrate compliance with the previously stated criteria. It is especially important, at the time of making the decision, to determine if there is a conflict of interest, seek appropriate advice to ensure compliance with the law and bylaws, and ensure that the decision is thoroughly analyzed considering reasonable judgment elements.

Examples of Jurisprudence

Below are some court rulings that analyze this rule. It is important to clarify that all of these were issued prior to the enactment of Decree 046 but contain elements and criteria found in the mentioned regulation.

In addition to providing information about practical cases, we present these examples to draw the attention of administrators to the fact that it is not uncommon for them to face lawsuits from shareholders or third parties when a legitimate business decision does not yield the expected results. Therefore, we emphasize that for certain decisions, they should seek advice and properly substantiate such decisions.

• Ruling No. 800-29 of May 14, 2014

Facts: The administrators of a company made financial decisions that resulted in significant losses. Shareholders claimed these decisions were made without due diligence and harmed their interests.

Decision: The Superintendence determined that the administrators acted with informed judgment, in good faith, and in the best interest of the company. It concluded that, although the decisions led to losses, negligence or conflict of interest was not demonstrated. The Business Judgment Rule protected the administrators from liability as they met the established criteria of acting rationally and in good faith.

• Ruling No. 800-52 of September 1, 2014

Facts: In this case, the sale of a significant asset was questioned, which some shareholders considered unfavorable and made with a conflict of interest.

Decision: The Superintendence analyzed the decision under the Business Judgment Rule, concluding that the administrators adequately disclosed potential conflicts of interest and obtained the necessary approval from shareholders. The sale followed an informed and transparent process, which exonerated the administrators from liability.

• Ruling No. 801-34 of June 11, 2014

Facts: An administrator implemented a business strategy involving high financial risks to improve the company’s market position. The strategy did not produce the expected results, and the company suffered losses.

Decision: The Superintendence concluded that, although the strategy failed, the administrator acted with informed judgment and believed they were benefiting the company. It determined that there was no negligence or bad faith, applying the Business Judgment Rule to protect the administrator from liability.

• Ruling No. 800-142 of November 9, 2015

Facts: A company decided to sell part of its assets to a company related to one of the administrators. Minority shareholders claimed that the transaction was harmful and favored the involved administrator.

Decision: The Superintendence found that the transaction was carried out after obtaining approval from the competent social body and in a transparent manner. The administrators acted in the best interest of the company, and the Business Judgment Rule applied to exonerate them from liability, as bad faith or conflict of interest was not demonstrated.

• Ruling No. 800-26 of April 13, 2016

Facts: The company adopted a new investment strategy in an emerging sector, which later failed, generating significant losses.

Decision: The Superintendence applied the Business Judgment Rule, determining that the administrators acted with informed judgment, due diligence, and in good faith. Although the investment was unsuccessful, the administrators were protected from liability because their decisions met the criteria of the rule.

Please do not hesitate to contact Brick Abogados if you have any concerns or would like further information on the topic discussed above.

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This document is for informational purposes only and does not constitute legal advice, nor does it commit the responsibility or professional opinion of Brick Abogados.