Business judgment rule

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Business law
Business organizations
Common law business forms:
Sole proprietorship
Partnership · Corporation
General partnership
Business trust
Statutory business forms:
Limited partnership
Proprietary limited company
Public limited company
Limited liability partnership
Limited liability company
Civil law corporate forms:
AB · AG · ANS · A/S · GmbH
K.K. · N.V. · OY · S.A.
EU law:
SE · SCE
Doctrines
Corporate governance
Limited liability · Ultra vires
Business judgment rule
De facto corporation and
corporation by estoppel
Piercing the corporate veil
Related areas of law
Contract · Civil procedure
The business judgment rule is a case law-derived concept in Corporations law whereby a court will refuse to review the actions of a corporation's board of directors in managing the corporation unless there is some allegation of conduct that (1) violates (a) the directors' duty of care, (b) duty of loyalty, or (c) duty of good faith; or (2) that the decisions of the directors lacks a rational basis. Courts often analyze the rational basis requirement as part of the director's duty of good faith.


Business law
Business organizations
Common law business forms:
Sole proprietorship
Partnership · Corporation
General partnership
Business trust
Statutory business forms:
Limited partnership
Proprietary limited company
Public limited company
Limited liability partnership
Limited liability company
Civil law corporate forms:
AB · AG · ANS · A/S · GmbH
K.K. · N.V. · OY · S.A.
EU law:
SE · SCE
Doctrines
Corporate governance
Limited liability · Ultra vires
Business judgment rule
De facto corporation and corporation by estoppel
Piercing the corporate veil
*Related areas of law*
Contract · Civil procedure

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. In short, it exists so that a Board will not suffer legal action simply from a bad decision. As the Delaware Supreme Court has said, a court "will not substitute its own notions of what is or is not sound business judgment" (Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)) if "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."(Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971))

The rationale for the rule is the recognition by courts that, in the inherently risky environment of business, Boards of Directors need to be free to take risks without a constant fear of lawsuits affecting their judgment.

The presumption raised by the Business Judgment Rule may be rebutted by the plaintiff. Typically, defensive actions that are: based on threats that are unreasonably perceived, unproportional to the perceived threat, or "cram a management alternative down shareholder's throats will successfully defeat presumption of the business judgment rule.

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