What is the Business Judgment Rule?

A director will not be found personally liable for a breach of duty of care if he or she meets the requirements of the business judgment rule (“BJR”). Under the BJR, a court will not second guess a business decision that in hindsight turned out to be poor or erroneous if the director acted in good faith and exercised due caution.

Under California law, in discharging his or her duties “a director is entitled to rely on information, opinions, reports, or statements,” prepared or presented by any of the following:

  • Corporate officers or employees who the director “reasonably believes to be reliable and competent”;
  • Legal counsel;
  • Accountants;
  • Other persons as to matters the director reasonably believes are within such person’s professional competence; or
  • A committee of the board of which the director is not a member.

Directors may use the BJR as a defense to the liability imposed in the event of a breach of duty of care by arguing that they acted in good faith and exercised due caution in relying on another individual’s statements because they believed that person to be reliable and competent.  However, the business judgment rule will not protect directors who were not reasonably diligent in informing themselves about a transaction prior to agreeing to take on the work.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims, including claims involving the business judgment rule. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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