Business Judgment Rule

Overview

The business judgment rule is invoked in lawsuits when a director of a corporation takes an action that affects the corporation, and a plaintiff sues, alleging that the director violated the duty of care to the corporation.

In suits alleging a corporation's director violated his duty of care to the company, courts will evaluate the case based on the business judgment rule. Under this standard, a court will uphold the decisions of a director as long as they are made (1) in good faith, (2) with the care that a reasonably prudent person would use, and (3) with the reasonable belief that the director is acting in the best interests of the corporation. 

Practically, the business judgment rule is a presumption in favor of the board. As such, it is sometimes referred to as the "business judgment presumption."

Defeating the Business Judgment Rule

There are a number of ways to defeat the business judgment presumption. If the plaintiff can prove that the director acted in gross negligence or bad faith, then the court will not uphold the business judgment presumption. Similarly, if the plaintiff can prove that the director had a conflict of interest, then the court will not uphold the business judgment presumption.

Burden of Proof

When the corporation pleads the business judgment rule, if the court finds that the presumption applies, the plaintiff then must prove that the business judgment rule does not apply. However, if the court finds that the presumption does not apply, then the board needs to prove that the process and the substance of the transaction was fair. 

Further Reading

For more on the business judgment rule, see this Florida State University Law Review article, this University of Florida Law Review article, and this New York University Law School Journal of Law & Business article