The business judgment rule is a case-law-derived doctrine that shapes how courts review decisions made by corporate directors. It recognizes that business decisions involve risk and that judges should not replace directors’ informed decisions with their own views simply because an outcome was poor.
The business judgment rule is a principle under which courts generally defer to corporate directors’ business decisions when the directors have properly performed their duties. It is found in some form in many common-law jurisdictions, including the United States, Canada, England and Wales, and Australia.
All flashcards
Business judgment rule
A doctrine under which courts generally defer to corporate directors’ qualifying business decisions.
Informed basis
A decision made after directors obtain and consider information appropriate to the circumstances.
Duty of care
The duty to use appropriate care and become adequately informed when making corporate decisions.
Duty of loyalty
The duty to avoid placing personal interests ahead of the corporation’s interests.
Corporate waste
An exchange so one-sided that no person of ordinary, sound judgment could find adequate value for the corporation.
Quiz questions
What does the business judgment rule generally require courts to do when directors satisfy its conditions?Answer: Defer to the directors’ business decision rather than substitute the court’s judgment.
Under the standard described for care claims in these notes, what level of negligence is required?Answer: Gross negligence
What concern distinguishes a duty-of-loyalty challenge from a challenge focused on care?Answer: Whether a director’s personal interest conflicted with the corporation’s interests.
Which review is identified for certain corporate takeover decisions?Answer: The more stringent Unocal test, also called intermediate scrutiny.
What must a plaintiff generally show initially to challenge directors’ conduct successfully?Answer: Evidence that the directors breached a fiduciary duty or another relevant obligation.