Business Judgment Rule


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Business Judgment Rule

In American business law, the concept granting members of the board of directors of a corporation the presumption that they intend to work for the company's profitability, provided they act in good faith. That is, courts assume boards of directors think they are doing the right thing even if an act harms the company in retrospect. This protects members from shareholder lawsuits in the event their actions do not go as planned. On the other hand, if a board of directors is found to have squandered the company's resources by, for example, grossly overpaying when buying or receiving far too little when selling assets, it may still be found legally liable.
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Some other difficulties are that stakeholder conflicts usually involve issues of corporate policy or strategy and the business judgment rule developed by the courts discourages judicial inquiry into policy issues.
A second argument for the business judgment rule is that courts are
Under a correct account of the tort analogy, the duty of care and the business judgment rule are not antipodes of a paradox, but are complementary principles governing duty and its scope.
Delaware courts have gone to great lengths to stress that, as long as the directors acted reasonably informed and in good faith, the fact that a business decision was manifestly unreasonable does not preclude the application of the business judgment rule.
Scholars have also justified the business judgment rule by pointing to the risk of hindsight bias.
With regard to the duty of care, the presumption of the business judgment rule (in particular the presumption that the directors acted on an informed basis) can be rebutted by showing that the directors, in a grossly negligent manner, breached their duty to inform themselves, prior to making the decision, of all material information reasonably available to them, or failed to act with requisite care on the basis of this information.
The business judgment rule has already been criticized on a number of grounds.
159) This business judgment rule presumes that directors' decisions are made on "'an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
The Delaware Court, in its ruling on the case, began by outlining the fundamental precepts of corporate law: (1) that directors, rather than shareholders, manage the business and affairs of the corporation, (2) that "the existence and exercise of this power carries with it certain fundamental fiduciary obligations to the corporation and its shareholders," (12) and (3) the business judgment rule provides a protection for directors in their decision-making so long as they acted "on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
Deepening Insolvency and the Business Judgment Rule IV.
value-maximizing duty, even with a strong business judgment rule, may be
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