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Business Judgment Rule: Bad Decisions by Directors or Officers are not necessarily a Breach of Duty.

On Behalf of | Apr 1, 2022 | Corporation & Company Law, Firm News |

The business judgment rule accepted by most US jurisdictions is intended to protect officers and directors from liability where they have made decisions in good faith and using appropriate procedures, even if those decisions turn out to be poor or have negative consequences to the corporation. Corporate officials eligible for protection under the business judgment rule are generally not liable for merely because they have made mistakes.

However, to be eligible for this protection, the corporate officials must have met certain standards of conduct. These are illustrated in the American Law Institute’s formulation of model business judgement rule language, crafted to help states draft laws on corporate governance. The ALI language provides:  “(c) A director or officer who makes a business judgment in good faith fulfills the [duty of care] if the director or officer: (1) is not interested in the subject of his business judgment; (2) is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and (3) rationally believes that the business judgment is in the best interests of the corporation.”

Corporate directors and officers are urged to always use reasonable business judgment when making corporate decisions in their judgment as in the best interest of the business.  The generally law includes some protection of those directors and officers under the business judgment rule for bad decisions so long as a reasonable duty of care is taken before making important corporate decisions.  The business judgment rule is not an impenetrable shield by any means, but is a key component of US corporate law jurisprudence.