Business Judgment Rule
The Business Judgment Rule is a legal doctrine that protects directors and officers from personal liability for business decisions made in good faith. Courts will generally defer to the decisions of a company’s leadership so long as those decisions were made in good faith, without a conflict of interest, and with the reasonable belief that the decision was in the best interest of the company. The rule exists because running a company involves risk-taking, and not every decision will turn out well. A bad outcome alone does not mean directors did anything wrong.
Example:
The board rejected the acquisition offer and pursued an aggressive growth strategy instead. When the company later struggled, shareholders threatened to sue, but the Business Judgment Rule protected the directors because they had acted in good faith after careful deliberation.