Reference no: EM131613576
Problem -
Growfast Pty Ltd (Growfast) operates a wholesale nursery growing and selling garden plants. Sam, Peter and Rose are the only shareholders and directors. Sam manages the company's day-to-day operations. Peter, who left school at 14 and has no tertiary qualifications, is in charge of the nursery. Rose is a non-executive director who does not take an active part in the management or operations of the company.
Until recently, Growfast has been very profitable. However, six months ago, a competing business opened nearby and since then Growfast's profits have dropped considerably. Sam thinks that Growfast should move to larger premises in a different area. Without consulting Peter or Rose he starts looking for new premises and he decides the first place he inspects is perfect, although the price is more than Growfast can comfortably afford. Sam does not think this will be a problem, because there is no competition nearby and he expects that profits will recover immediately. Same calls a board meeting and tells Peter and Rose that moving will solve all the company's problems and that this property he has seen is absolutely perfect for Growfast. He says they will have to act quickly as there is another interested purchaser. Same does not tell Peter and Rose that he only looked at this one property. He is so enthusiastic that both Peter and Rose agree to the proposal even though Rose is doubtful, feeling that they are being rushed into making a decision without being given time to consider other alternatives. Peter agrees to Sam's proposal without really understanding the financial implications.
Growfast purchases the new premises but, because of continuing dry weather, its profits remain low. Rose is becoming worried about her obligations as a director, especially if Growfast's financial position deteriorates any further.
Advise Rose about:
(i) her position in respect of any breaches of her statutory duty of care and diligence as a director; (ii) whether her decision to agree to the purchase of the new premises would be protected by S.180 (2)
What is the rationale of the business judgment rule - does it allow directors too many opportunities to avoid the consequences of poor business decisions?