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business judgment rule

The business judgment rule provides a director  of a corporation  immunity from liability when a plaintiff  sues on grounds that the director violated the duty of care  to the corporation so long as the director’s actions fall within the parameters of the rule.

In suits alleging a corporation's director violated their 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."

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

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

[Last reviewed in June of 2022 by the Wex Definitions Team
]

Keywords

• business organizations

• corporations

• business law

• commercial law

• directors

• duty of care

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