9.02 EXPLANATORY: BUSINESS JUDGMENT
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More globally, the court stated, therefore, that the business judgment rule does not apply if the board (i) committed fraud, corporate waste, engaged in self-dealing, made decisions affected by a conflict of interest, acted in bad faith or with corrupt motive, or breached the duty of due care by having reached their
The Business Judgment Rule 1 Officers and directors must make decisions that they believe, in good faith, to be in the best interests of their companies and must make decisions after appropriate research and due diligence inquiries. The decisions must be the products of appropriate care and thought.
The business judgment rule gives directors protections from honest mistakes if they act with due care and loyalty. It is inapplicable if directors commit oppression or breach their fiduciary duties, e.g., if the directors stand to gain a personal benefit.
The business judgment rule provides a director of a corporation immunity from liability when a plaintiff sues on grounds that the director violated the duty of care to the corporation so long as the director's actions fall within the parameters of the rule.
Example of the Business Judgment Rule The board decides that discontinuing the product would free up resources necessary to focus on more profitable areas. In this case, the business judgment rule protects directors from prosecution by shareholders who disagree with their decision or who are adversely affected by it.
Under this standard, a court will uphold the decisions of a director as long as they are made (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the director is acting in the best interests of the corporation.
Fraud or Bad Faith If the director chooses to lie or to deliberately conceal information from the company or the rest of the board, any decisions made on the basis of those lies will ultimately result in civil and/or criminal liability on the part of the director committing the fraud.
The initial burden of proof is on the party challenging a director's decision. If the claimant fails to meet the evidentiary burden, the business judgment rule attaches to protect directors and the decisions they make.