The Business Judgment Rule: Understanding Director's Liability Protection
What is the business judgment rule and how does it protect corporate directors?
The principle that mistakes made by directors on the basis of good-faith judgment can be forgiven involves both: (i) the exercise of due care (ii) is referred to as the business judgment rule. How does this rule shield directors from personal liability?
Answer:
The business judgment rule is a legal principle that provides protection to corporate directors from personal liability for their decisions under certain conditions. One of these conditions is that the directors must have acted in good faith, meaning they made decisions honestly and in the best interests of the company.
When directors make mistakes or errors in judgment while acting in good faith, they are shielded from personal liability for any resulting losses or negative outcomes. However, this protection is not absolute. It is dependent on the directors exercising due care in their decision-making process.
Due care refers to the level of prudence and diligence expected from a reasonable and responsible person in a similar position. If directors fail to exercise due care, they can still be held liable for their decisions, even if made in good faith.
In summary, the business judgment rule offers directors protection when they act in good faith and exercise due care in their decision-making processes. It recognizes that directors cannot always predict the future accurately and allows them to make decisions without the fear of personal liability if their intentions align with the company's best interests.