Banking and Business Monthly – July 2022

The duty of care is one of the fiduciary duties corporate directors owe shareholders. Put simply: the duty of care focuses on how officers and directors make business decisions.

You can’t talk about the duty of care without talking about the so-called business judgment rule. Undoubtedly, the leading example here in Illinois is the fabled case of Shlensky v. Wrigley, 237 N.E.2d 776 (Ill. App. Ct. 1968).

On May 24, 1935, the first night game in major league history was played at Cincinnati’s Crosley Field, where the Reds beat the Phillies 2-1. President Franklin D. Roosevelt threw out the ceremonial “first switch” at the White House in Washington D.C., turning on the lights in Cincinnati. Soon after, 19 of 20 National League teams were playing night games under the lights—everyone except for the Chicago Cubs.

In fact, the Chicago Cubs didn’t host a night game at Wrigley Field until August 8, 1988—more than 50 years after the Reds played the Phillies!

Philip K. Wrigley, 80% owner and President of the Cubs, and proud member of the Wrigleyville community, refused to install lights at Wrigley Field, insisting that “baseball is a ‘daytime sport’ and that installation of lights and night games will have a deteriorating effect on the surrounding neighborhood.” Id. at 778. As a result, the Cubs sold fewer tickets and were less profitable than any other major league team—Chicagoans were hard at work while the Cubs were playing at home!

Consequently, Chicago Cubs shareholders, including Shlensky, brought a lawsuit against Mr. Wrigley, challenging the directors’ decision not to play at night. In 1968, the court affirmed Wrigley’s decision against night baseball.

In reaching its conclusion, the appellate court considered whether Wrigley’s failure to maximize profit for shareholders constituted a breach of his fiduciary duties to shareholders. The court said no—a corporation’s directors have the authority to determine what course of action is best for business. While the president and board must have a valid business purpose behind their actions, a decision motivated by a valid business purpose will be given great deference by a court.

In this case, while Shlensky disagreed with Wrigley’s course of action, Wrigley could have reached the legitimate business conclusion that the Cubs were better off not playing night games. For example, Wrigley and the board may have been concerned about maintaining goodwill within the Wrigleyville community, or maybe Wrigley was concerned about additional costs associated with the lights. Perhaps Wrigley believed that night games would not have increased profit like Shlensky alleged. Whatever Wrigley’s reasoning, the court believed that the decision about whether playing night games would make the corporation better off was so complex that it was best left to Wrigley rather than the court. In this way, Wrigley stands for the proposition that courts will never second-guess a director’s decisions for any reason absent allegations of “bad faith, fraud, illegality, or conflict of interest.” Id.

Ultimately, Shlensky v. Wrigley illustrates the power of the business judgment rule. Under this rule, officers and directors are shielded from liability for honest errors or mistakes of judgment as long as they have a valid business purpose to justify their decisions. According to Wrigley, the “judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve.” Id. at 779.

Business disputes between directors, officers, and shareholders are common. In addition to the duty of care, corporations owe shareholders other fiduciary duties, such as the duty of loyalty. If you are involved in a business dispute and would like a free initial consultation to see how we can assist you, please contact me at (847) 705-7555 or at smigala@lavellelaw.com.