How Does the Business Judgment Rule Protect Corporate Executives?

Corporate attorneys at Gehres Law Group, P.C. provide representation to companies and executives when these parties are at risk of being sued.  Executives have some protection from personal liability for decisions made in the course of doing business, and should consult with an experienced attorney to understand when and how the business judgement rule can provide protection. 

How Does the Business Judgement Rule Protect Corporate Executives?

In California, there are two parts to the business judgement rule. The first part of this rule provides protection for corporate directors so they are not held personally liable for business decisions if they comply with the standards found within the relevant statutes. For nonprofits, the standards are found in California’s Corporation Code section 7231 and for for-profit corporations, the standards are established in California’s Corporations Code section 309.

There is also a common law aspect of California’s business judgement rule which protects against court intervention in management decisions made by directors acting with a good faith belief regarding the best interests of the corporation. Click here for more information on the common law aspect of this rule.

In order for a director to be protected from liability by the statutory protections in the Corporation Code, the requirements that must be fulfilled include:

• The director acted in good faith.
• The director acted in what he or she believes to be the corporation’s best interests and the best interests of the company’s shareholders.
• The director acted with such care that an ordinarily prudent person in the same position would exercise. This can include making reasonable inquiries. Directors are allowed to rely on information, statements and opinions provided by other reliable and competent officers or corporate employees; information from independent accountants or counsel; and board committees that the director has confidence in.  If the director relies upon information from committees, the director must act in good faith and must make reasonable inquiries if necessary.
• The director must not have any knowledge about the information or individuals upon which the director relies that would cause the reliance to be unwarranted. 

Provided that a director has complied with these specific requirements in making decisions, the director cannot be held accountable for the consequences of decisions that he or she made in accordance with these provisions when acting within the scope of his or her official duties.

The second part of the business judgment rule also insulates a board of directors and corporate executives from court interference in business decisions. The common law business judgement rule requires that courts defer to the judgements made by corporate directors as long as there is no conflict of interest, breach of trust, or fraud. Provided the decision by executives or board members was made in good faith, courts will not typically substitute their own judgement for the judgement of those individuals in charge of business operations. 

Getting Help from Corporate Attorneys

Corporate executives who are facing legal action because of their role in decision-making for their organization should consult with the corporate attorneys at Gehres Law Group, P.C. Our experienced legal team provides representation in mediation, informal disputes, arbitration, and court proceedings, and can help business executives take advantage of the protections that the business judgement rule provides to them. Call or contact us online today for your complimentary consultation.

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