Business judgment rule
Legal presumption protecting directors who make informed, good-faith business decisions from personal liability.
Definition
The business judgment rule is a presumption that directors of a corporation acted on an informed basis, in good faith, and with the honest belief that their decision was in the corporation's best interests. The rule shields directors from personal liability for ordinary business decisions that turn out badly. Established in modern form by Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
Context
Applies to corporations under Delaware General Corporation Law. Analogous duties apply to LLC managers under 6 Del. C. § 18-1101, modifiable by Operating Agreement.
Example
A Delaware C-Corp board approves an acquisition that later loses value. The business judgment rule shields directors from personal liability if they were informed and acted in good faith.
Common pitfalls
- Rule does not apply if directors were uninformed (failed duty of care) or had conflicts of interest (failed duty of loyalty).
- LLC member duties can be substantially modified in the Operating Agreement; the implied covenant of good faith remains.