Fiduciary Duty:
Business Judgment Rule
Business Judgment Rule: The legal protection for director’s actions under the corporate structure.
- Under the business judgment rule, absent evidence of bad faith, fraud, illegality or gross overreaching, courts are not at liberty to interfere with the exercise of business judgment by corporate directors.
Purpose: To protect against honest mistakes.
- The purpose of this rule is to protect directors who have been diligent and careful in performing their duties from being subjected to liability from honest mistakes of judgment.
Due Care Required: Due care must be exercised to obtain the protections of the Business Judgment Rule.
- It is a prerequisite to the application of the business judgment rule that the directors exercise due care in carrying out their corporate duties. If directors fail to exercise due care, then they may not use the business judgment rule as a shield for their conduct.
- One component of due care is that directors must inform themselves of material facts necessary for them to properly exercise their business judgment. (directors “may not close their eyes to what is going on about them in corporate business, and must in appropriate circumstances make such reasonable inquiry as an ordinarily prudent person under similar circumstances”). Thus, the business judgment rule is defeated where directors act without “becoming sufficiently informed to make an independent business decision.