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What is the business judgment rule?

On Behalf of | Nov 30, 2022 | Business & Commercial Litigation |

If you are a director of an office of a Georgia business or sit on the board of directors of a Georgia corporation, you know these roles come with many responsibilities. You must make many important decisions with the best interest of the company in mind.

Sometimes, making these decisions can be challenging, and it is not easy to know what the right decision is. You may do extensive research, analyze options and weigh all the pros and cons before deciding what to do.

How the business judgment rule protects you

Fortunately, you are protected by the business judgment rule. This is a legal concept designed to protect businesses from lawsuits alleging breach of fiduciary duty.

The business judgment rule automatically presumes that you are acting in good faith when you make decisions. You are assumed to be making choices that are in the best interests of the business and its shareholders.

The duties of loyalty and care

Anyone who wants to challenge this must prove that you breached your fiduciary duty to the business. Your fiduciary duty includes the duty of loyalty and the duty of care.

The duty of loyalty requires you to put the interests of the business above your own personal interests. The duty of care mandates that you act as a reasonably prudent person would and engage in due diligence when making decisions.

However, the business judgment rule does not protect you under all circumstances. It is meant to shield a business from lawsuits that are brought by disgruntled individuals who are simply not happy with something a business did, ultimately clogging the court system with frivolous business litigation.

Exceptions to the business judgment rule

However, if clear evidence is shown that you have breached your fiduciary duty, you may not be protected by the business judgment rule.

For example, you are not protected by the business judgment rule if evidence is shown that you had a conflict of interest, engaged in fraud or made a bad faith decision.

The business judgment rule does not protect you from a lawsuit being filed but can be a strong defense against allegations. Understanding how to defend yourself using the rule is crucial.