- posted: Dec. 20, 2023
The business judgment rule (BJR) is a legal principle that can provide immunity to corporate directors who are accused of violating their fiduciary duty to the corporation and thus causing harm. A court will generally defer to directors’ business judgment if they can show that their decisions were made in good faith, with the level of care a prudent person would exercise and under the reasonable belief that they were in the corporation’s best interests. The rule recognizes that business decisions often involve calculated risks and that directors cannot guarantee successful outcomes.
The BJR applies to a wide range of corporate decisions, including those related to mergers and acquisitions, new product development, executive compensation and other strategic matters. It provides a safe harbor for directors, allowing them to make informed decisions without the fear of being held personally liable. This, in turn, fosters a more proactive and entrepreneurial approach to business management.
While the BJR offers substantial protection, it is not without limitations. In a lawsuit, the rule operates as a presumption that directors have acted for the benefit of the corporation. However, a plaintiff can overcome that presumption by showing evidence of any of the following:
Waste — Directors cannot make decisions that dissipate corporate assets, such as by overpaying for property and services. An example is excessive compensation of a top executive.
Fraud — Directors cannot engage in deceit, misrepresentation or other conduct intended to benefit the director or others at the expense of the corporation and its shareholders.
Self-dealing — Directors violate their duty of loyalty by having the corporation enter into transactions with entities in which the directors have a direct financial interest.
Gross negligence — In making business decisions, directors must not overlook material facts that are readily ascertainable and that could have a detrimental effect on the corporation.
If a director is found to have committed any of this conduct, they may be held personally liable for the harm caused to the corporation. A court can order money damages, disgorgement of profits or other relief designed to remediate the harm done.
Understanding the scope and limitations of the BJR is essential for corporate directors, ensuring that they operate within the boundaries of the rule and fulfill their fiduciary duties to the company and its shareholders.
An experienced business law attorney can assess the potential risks associated with a particular business decision and advise clients on how to structure their actions. Our firm can provide invaluable guidance to clients in navigating the complexities of rule. By thoroughly understanding the nuances of the BJR, its applications and its limitations, you can make more informed decisions.
At Garcia & Gurney, A Law Corporation, we offer guidance to businesses throughout Alameda County and the Tri-valley area on complying with the business judgment rule and represent them in other business matters. To schedule a consultation at our Pleasanton office, call 925-468-0400 or contact us online.