Business Judgment Rule Law & Legal Definition


Business judgment rule is a legal principle that makes officers, directors, managers, and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when there is sufficient evidence to show that the transactions were made in good faith. It is presumed that the directors of the company carry along with them a bona fide regard for the interests of the corporations. Therefore in most cases the court refuses to review the actions of the directors of a corporation unless there is an allegation on the conduct that the directors violated their duty of care to manage the corporations to the best of their ability. The best judgment rule specifies that the court will not review the business decisions of the directors who perform their duties:

1. in good faith;

2. with care that an ordinary prudent person in a like position would exercise under similar circumstances; and

3. in a manner the directors reasonably believe to be in the best interests of the corporation.

The business judgment rule is very difficult to overcome and courts will not interfere with directors unless it is clear that they are guilty of fraud or misappropriation of the corporate funds or in other similar situations.

In effect, the business judgment rule creates a strong presumption in favor of the Board of Directors of a corporation, freeing its members from possible liability for decisions that result in harm to the corporation. The rule also prohibits transactions of self interest.

To satisfy the best judgment rule, the directors of the corporation should:

1. act on an informed basis;

2. act in good faith;

3. act in the best interests of the corporation;

4. not involve self-interest _duty of loyalty concept plays a role here_;

5. not be wasteful.

The following is an example of a case law defining business judgment rule:

The business judgment rule is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company _Smith v. Van Gorkom, 488 A.2d 858, 864 _Del. 1985__.