Business Courts as Loci of Privilege: The Business Judgment Rule Abroad

Can specialized business courts function as loci of privilege, prioritizing business as a sphere of social action? Our article addresses this question, demonstrating how business courts express the structured power of business and businesspersons. We do so by describing and analyzing the adoption of the business judgment rule by the Israeli Business Court.

Structural Power and Business Courts

Market economies give businesses and businesspersons great power, and a privileged position within legal, political, and economic systems. Courts are one arena of structural power. They affect the economy in several ways: by allocating resources between litigants, as by ordering one to pay another; by embracing or abandoning rules that favor certain social groups; and by courts’ own resources being allocated between different case and hearing types, as where a specialized court has been created.

Business courts are specialized courts, judicial tribunals or court divisions that focus primarily on business cases. The parties involved in those cases are typically corporations, their officers, their shareholders, their creditors, and their directors. Business courts have been established in various US states, as well as all over the world. Channeling scarce public resources to such courts, as by assigning judges to hear business cases exclusively, can channel them away from case types more directly concerned with assisting the vulnerable, such as tort or immigration cases. Where a jurisdiction’s substantive business law expresses an attempt to attract businesspersons to incorporate under the jurisdiction’s law or use its courts, that law is likely to follow a business-friendly, and, specifically, a manager-friendly, direction. The best-known example of such a state of affairs is Delaware corporate law.

Where specialized business courts apply substantive business law that favors stronger-than-average social groups such as corporate directors and officers, those groups enjoy a double privilege, both institutional and substantive: rules of law advancing their interests, applied by judicial fora the existence of which prefers those same interests.

Our article uses qualitative and quantitative analysis to examine the preferential treatment of businesspersons at specialized business courts, focusing, as a case study, on the Israeli Business Court's comprehensive adoption of the business judgment rule. We demonstrate how specialized business courts influence the distribution of resources between court users, as well as across society, and how they express and enhance the existing structured power of business.

A Privileged Adjudicatory Channel: the Israeli Business Court’s Embrace of the Business Judgement Rule

The Israeli Business Court (formally known as the economic department of the Tel-Aviv District Court) was created in a 2010 statutory amendment. It was established as a local equivalent of the Delaware Court of Chancery, providing an international example of institutional isomorphism. Following its establishment, it quickly emerged as a focal point for an elite community of Israeli lawyers, judges, and legal academics characterized by a strong appreciation for Delaware corporate law. That appreciation drove the court to receive into Israeli law a Delaware law doctrine that the Israeli legislature had previously rejected: the Business Judgment Rule (BJR).

The BJR provides that absent bad faith, a conflict of interests, or uninformed decision-making, courts shall not review or interfere with the substance of businesspersons’ business decisions. It reflects business’s structural power, in that courts, which review decisions by professionals such as physicians or engineers, as well as by politicians and public servants, leave the substance of businesspersons’ decisions unexamined, confining themselves to examining the process whereby those decisions are made. While courts are not business experts, and their second-guessing of business decisions may create suboptimal incentives, the same is true of a court’s review of decisions by all professionals except lawyers and of decisions by politicians and public servants. In eschewing substantive review of businesspersons’ decisions, courts, therefore, prioritize businesspersons over other professionals. That courts leave much business decision-making unexamined demonstrates the distribution of social and economic power: courts’ power trumps that of non-business professionals and, occasionally, that of politicians and public servants, but business’s power trumps that of courts. This reflects the existing structured power of business.

We conducted our case study using two research methods: a qualitative description of the creation of the Israeli Business Court and formative stages in the reception of the BJR into Israeli law, and a quantitative analysis of an original database including all 124 decisions given in the Israeli courts until July 17, 2021, where the BJR was either mentioned or applied. We found that, while until the creation of a specialized business court, Israel had avoided adopting the BJR, turning down a key opportunity to do so by legislation, the rule was first applied just as the Business Court was being established in 2010 and was then applied with growing frequency by the Business Court. Nearly half the decisions in our database (fifty-nine of 124, or 47.6 percent) were handed down in that court.

The BJR’s constant application by the Business Court led to the rule’s adoption as binding precedent by the Supreme Court of Israel in Varednikov v Alovich, which was decided on December 28, 2016, slightly more than six years after the establishment of the Israeli Business Court. The establishment of the Israeli Business Court was part of a significant transformation of Israeli corporate law, reshaping it so as to more closely resemble that of the state of Delaware.

This transformation included a significant reduction in the risk of liability to which corporate directors and officers are exposed under Israeli law: where, before the transformation, directors and officers were subject to substantive evaluation of their conduct, approximation of Delaware law shielded them from such evaluation. Business court judges were especially quick to protect directors and officers from substantive evaluation of their conduct in cases of public and non-controlled corporations, where directors and officers are supposed to be more exposed to market discipline than in private and controlled corporations, respectively. While public corporations have always been a tiny sliver of all Israeli corporations – at the end of 2023 they made only 0.13 percent of Israeli corporations – 51 percent of the corporations at issue in decisions where Israeli courts mentioned or applied the BJR were public.

Once the BJR was received into Israeli law, its ambit of application was quickly expanded from claims that defendant directors and officers had breached their duty of care—the focal doctrinal site of the rule’s application—to a large variety of other claims. While our case study cannot be seen as proof that business courts generally, across time and space, express and enhance the power of business and business persons, we do show that business courts can be a privileged adjudicatory channel accessible to businesspersons and their counterparties, which channel is used to change the law to express the interests of corporate directors and officers. Our study, executed in the vein of progressive or critical corporate law scholarship, demonstrates how a specialized court, funded by the state, entrenches existing differences in socio-economic power.

Adam Hofri-Winogradow is Associate Professor, Allard School of Law, University of British Columbia

Inbal Maimon-Blau is Assistant Professor, Faculty of Law, Ono Academic College

The full paper is available here.

The data, codebook, and statistics produced for the paper are available here.