The business judgment rule is an important aspect of business, and an essential instrument in a high-level executive’s toolbox. Corporate directors are required to make important business decisions on a daily basis, and need some kind of assurance that if a decision results in a loss of company value, they will not be held personally liable.
The business judgment rule can be divided into two main sections. The first part is statutory, stemming from Corporations Code sections 7231 and 309, intended for nonprofit and for profit companies respectively, which insulate corporate directors from personal liability if they act in accordance with these sections.
The second part of the business judgment rule is based on common law. This custom prevents the court from intervening in any management decisions made by corporate directors in good faith.
As long as a director acts in good faith and what he or she believes to be in the best interests of the company, a director is protected by the business judgment rule. This includes making a decision based on faulty information, as long as it can be proved that the executive was not aware of this, and another prudent person in the same position would have likely followed said information.
The application of the business judgment rule is decided on a case by case basis, and is an intensely fact driven issue. Corporate directors who faithfully comply with the statutory and common law requirements of the business judgment have a powerful shield from any personal liability due to a loss in company value.
Executives are expected to always be well-informed of the potential outcomes and impacts of any and all business decisions they may make, and expected to act in good faith. When a corporate director chooses not to comply with these statutory and common law standards, he or she may fall outside the protection of the business judgment rule.
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If you find yourself in need of guide with the business judgment rule or business law, give us call to schedule a consultation at: 925-468-0400. Or, contact us through our website.
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