The U.S. Court of Appeals for the Third Circuit held that the business judgmentrule did not insulate a corporation from its obligation to indemnify individuals covered by an indemnification clause. After losing in the District Court, the corporation appealed, claiming that the District Court incorrectly rejected its argument that the Board’s decision to withhold indemnification was a valid exercise of its business judgment that should not have been overturned.

The Court of Appeals first noted its view that it was “at a loss to see” how the Board’s exercise of business judgment in withholding indemnification could protect the corporation if, under the terms of the indemnity clause, indemnification was required. However, because both parties viewed the business judgment rule question as critical, it then proceeded to analyze whether the Board’s exercise of its business judgment was valid. Despite the corporation’s argument that information before the Board, including advice of counsel, provided a sufficient basis for its decision, the Court disagreed.

After questioning the merit of the corporation’s “advice of counsel” argument (because the corporation refused to disclose the content of that information), the Court found that other infirmities established that the Board failed to act with “reasonable diligence” in deciding to withhold indemnification, including (i) failing to conduct “any investigation into the veracity of the allegations” against the claimants, and (ii) refusing to interview the claimants despite their repeated requests to speak with the Board. Accordingly, theCourt declined to apply the business judgment rule so as to reverse the District Court’s ruling. (American Society for Testing & Materials v. Corrpro Companies, Inc., No. 05-4164, 2007 WL 656326 (3d Cir. Mar. 6, 2007))