Litigation Law Alert: Alaska Supreme Court Clarifies the Business Judgment Rule for Board Members

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On Friday, the Alaska Supreme Court decided Henrichs v. Chugach Alaska Corp., No. S-13094 (Apr. 22, 2011), in which it confirmed the vitality of the common law business judgment rule in Alaska.

This case arose from a 2004 dispute between two factions of the Chugach Alaska Corporation (CAC) Board. One faction gained control and appointed Henrichs as Chair. During his time as Chair, Henrichs approved a letter to shareholders encouraging them to send in their proxies in order to be eligible for a large cash prize. This letter was challenged by several shareholders as being false and misleading, and ultimately the Alaska Division of Securities asked CAC to issue a clarifying letter.

After Henrichs lost his position as Chair, CAC sued him alleging that he had engaged in a pattern of misconduct that violated his duties to the corporation. The jury agreed, finding both a specific breach of fiduciary duty with regard to the shareholder letter and a general breach of fiduciary duty with regard to the manner in which Henrichs conducted meetings, failed to comply with corporate bylaws, took actions without Board approval, ignored long standing Board practice, and excluded, mistreated, and retaliated against other Board members. The jury awarded CAC $34,500, and the trial court banned Henrichs from serving on the Board for five years.

Henrichs appealed. One of his arguments on appeal was that the business judgment rule insulates directors from liability unless their conduct is grossly negligent. The Alaska Supreme Court reviewed its earlier decisions discussing the common law business judgment rule, as well as the director "duty of care" statute enacted by the Alaska Legislature in 1988. It ultimately clarified that the common law business judgment rule was not modified by the duty of care statute.

In Shields v. Cape Fox Corp., 42 P.3d 1083 (Alaska 2002), the court had stated that the "business judgment rule is set out in AS 10.06.450(b)" of the revised corporate code1 The Shields court's statement had caused concern that the common law business judgment rule no longer retained vitality in Alaska as a separate source of protection for corporate directors. But the Henrichs court held that "corporate directors in Alaska continue to enjoy the heightened protection of the business judgment rule as set forth in Alaska common law."

The court provided little new guidance as to the scope of that protection. It recounted that in Alaska Plastics v. Coppock, 621 P.2d 270 (Alaska 1980), it had held "that for a director to be personally liable for good faith decisions made in the supervision and management of a corporation's business affairs, a claimant must show conduct that amounts to something more than ordinary negligence." Shortly thereafter, the court stated that "[a]bsent bad faith, breach of fiduciary duty, or acts contrary to public policy, we will not interfere with the management decisions of the firm." Betz v. Chena Hot Springs Group, 657 P.2d 831 (Alaska 1982).

While the court acknowledged that it had not defined fully the scope or degree of protection available under the business judgment rule, it declined to adopt a gross negligence standard. It held that Henrichs' conduct was not saved by the business judgment rule, because the jury found he had committed breaches of his fiduciary duties, and the trial court noted that his conduct was volitional, "serious and egregious."

In a potentially predictive concurrence, Justice Winfree opined that the common law business judgment rule may be applied only in favor of directors meeting the standard of care set out in Alaska Stat. § 10.06.450(b). He contrasted the statutory duty of care, which he suggested sets the framework for reviewing the reasonableness of the corporate decision-making process, with the business judgment rule, which in his view provides a framework for reviewing the quality of a corporate decision.

For more information, please contact James Torgerson or your Stoel Rives attorney.


[1] Alaska Statutes § 10.06.450(b) provides in part: "A director shall perform the duties of a director, … in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care, including reasonable inquiry, that an ordinarily prudent person in a like position would use under similar circumstances."

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James E. Torgerson
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