Be Represented by a Law Firm That is Well-Established in Eminent Domain Cases

  1. Home
  2.  » 
  3. Business Litigation
  4.  » The basics of the business judgment rule in California

The basics of the business judgment rule in California

On Behalf of | Nov 11, 2022 | Business Litigation

For any company in California to run successfully, shareholders must elect directors to make decisions that propel the business forward and ensure profits. However, all decisions carry some risk; therefore, it would seem unfair for shareholders to punish the directors if something were to go wrong. This situation is where the business judgment rule comes in; it protects directors from the consequences of their decisions as long as they comply with the requirements set forth by the law and business customs.

Understanding business judgment rule

The business judgment rule is a legal principle that shields corporate directors from liability if their business decisions turn out to be unsuccessful. This rule is essential because it allows directors to take the necessary risks for the company. Without such protection, directors might be less likely to make bold decisions, which could stifle innovation and growth.

To comply with the business judgment rule, directors must act:

  • In good faith
  • With a reasonable belief that their actions are in the best interests of the company
  • With the care that an ordinary person would use in similar circumstances
  • With the knowledge that is reasonably available to them

Exemptions to the business judgment rule

There are circumstances where business litigation may ensue when a director decides the company that leads to losses or destroys its goodwill in the market. These instances can include cases where:

  • They decided with actual knowledge that it would violate state or federal law
  • The decision was grossly negligent
  • They made their decision with the intent to commit fraud
  • They decided to benefit themselves rather than the company

It’s important to note that the business judgment rule is only a defense against liability; it does not protect directors from lawsuits. For example, shareholders can still sue directors for breach of fiduciary duty or waste of corporate assets, even if the directors acted in good faith and in the company’s best interests.