Define and explain the purpose of the business judgment rule. Under what circumstances would the rule apply? When would the protection not apply? Discuss fully

Answer 1

In cases challenging board decisions for breach of the duty of care, the courts generally defer to the business judgment of the directors, acknowledging that courts are ill equipped to second-guess directors' decisions at a later date. Under the business judgment rule, as long as certain standards are met, a court will presume that the directors have acted in good faith and in the honest belief that the action taken was in the best interest of the company. The court will not question whether the action was wise or whether the directors made an error of judgment or a business mistake. To take advantage of the rule the directors must have made an informed decision with no conflict between their personal interests and the interests of the corporation and its shareholders. Courts will not respect directors' business judgment if the directors (1) were interested in the transaction; (2) did not act in good faith; (3) acted in a manner that cannot be attributed to a rational purpose; or (4) reached their decision by a grossly negligent process.