Business Judgment Rule Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Business Judgment Rule, written in plain English, along with examples of how it is used.
What is Business Judgment Rule?
“Protection afforded corporate directors to not hold them personally accountable for mistakes in business judgment, as along as self-interest did not drive the decision.
History and Meaning of Business Judgment Rule
The Business Judgment Rule is a legal principle that affords protection to corporate directors and officers regarding their business decisions. The rule states that as long as the decision made was done in good faith and with reasonable care, the court will not hold the directors and officers personally liable for the consequences of the decision.
The Business Judgment Rule originated in the United States in the early 20th century and has since been adopted by several other countries. The rule is intended to encourage directors and officers to make business decisions without fear of personal liability, as long as they considered all relevant information and acted in the best interest of the company.
Examples of Business Judgment Rule
A company's board of directors decides to acquire a smaller company to expand its market share. The acquisition turns out to be a failure, and the company becomes financially unstable. However, since the decision was made in good faith and with reasonable care, the board of directors is not held personally liable for the loss incurred.
A CEO of a company decides to invest heavily in research and development to launch a new product. The product fails to gain market acceptance, and the company incurs substantial losses. However, the CEO is not held personally liable for the decision since it was made with reasonable care and in good faith.
Legal Terms Similar to Business Judgment Rule
Duty of Care: A legal principle that requires directors and officers to act with reasonable care and diligence while making business decisions.
Duty of Loyalty: A legal principle that requires directors and officers to act in the best interest of the company and not use their position for personal gain.
Fiduciary Duty: A legal principle that requires directors and officers to act in the best interest of the company, its shareholders, and stakeholders.