Question

Essay
27. Discuss the business judgment rule.

Answer 1

Business Judgement rule:

If you are an officer or director of a corporation then you are responsible for managing and directing the business and affairs of the corporation. The larger the business, the more challenging the issues the officers face.

Example: Should your fashion tech start-up expand and open up a store? What if the lease is in a building that your family owns and the terms are unfavorable for the company?

Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence.

Its a case law which acts as a guard for the corporation's board of directors from frivolous allegations about the way it conducts business.

The legal presumption that the management of a firm (board of directors) is acting in the firm's best interest and, therefore, its decisions are protected from judicial review. It protects the management from decisions that result in loss or turn out to be wrong. If the management is found, however, to be in violation of its fiduciary duties, the rule does not apply and its activities come under the scrutiny of the courts.