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What is the “Business Judgment Rule”?


The “Business Judgment Rule” is a legal principle that protects the officers and directors of corporate entities (for example, a corporation or LLC) from liability for certain kinds of actions (when acting in their official roles, on behalf of the entity).

In simplified terms, the rule says that if a director or officer acts reasonably, in good faith, and in accordance with appropriate “business judgment” (when compared with the way another reasonable person would act in his or her position), that officer or director is not liable (to the entity or its shareholders) if the entity suffers damages, or if the decision turns out to be a poor one (viewed retroactively).

Like most concepts in the law, the application of the rule is not exactly that simple. It’s necessary to review important factors surrounding the decision (which may be a decision to act, or a decision not to act), and to evaluate whether (or not) the individual in question acted with reasonable business judgment. For example:

  • what information did the officer or director rely upon when making the decision?
  • did the officer or director consult with experts (e.g., legal counsel, consultants, knowledgeable managers or employees) before making the decision?
  • was the decision brought to, considered by, and/or voted on by the entity’s board of directors, managers, or other officers?
  • was the decision within the scope of the officer or director’s authority?

This is not a comprehensive list, but it gives you some idea of the types of questions, and factors, that should be considered when evaluating whether or not a director or officer can rely on the business judgment rule.

If you believe someone (whether a corporate officer or director, the trustee of a trust, an agent, or another person in a fiduciary position) has breached his or her fiduciary duty, and that you were injured as a result, consult a lawyer immediately for an evaluation of your legal rights. The statutes of limitation (that is, the period within which you must bring a legal claim, or it will be lost) vary, depending on the nature of the claim, the fiduciary’s position, and other factors. It’s important to understand your legal rights, and the length of time you have to bring a claim, as soon as possible.


Disclaimer: THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY, AND DOES NOT CONSTITUTE LEGAL ADVICE OR CREATE AN ATTORNEY-CLIENT RELATIONSHIP BETWEEN THE AUTHOR OR ROSS LAW AND ANY PERSON. Your legal rights and experiences may vary. Never use an online article (including this one) to evaluate your legal rights or claims. Consult an experienced attorney promptly to obtain a personalized evaluation of your claims, potential damages, and the various legal rights and options available to you.

You may lose or compromise your rights if you delay in consulting legal counsel. Most legal claims (and defenses), as well as legal and court procedures, are complicated and fact-dependent. If you believe you have a claim against someone who injured you, a lawyer who represented you in a previous lawsuit, or any other legal claim, consult an experienced lawyer immediately for an evaluation of your individual rights and claims.

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