The Business Judgment Rule: Understanding Its Meaning, Implications, And Exceptions

Through an individual shareholder lawsuit or a derivative shareholder lawsuit, a shareholder may be able to hold a corporation’s officers or directors legally responsible for damages. That being said, there is a well-established judicial doctrine in the United States called the business judgment rule that provides significant legal protection to corporate officers and directors. In this blog post, our Miami shareholder dispute attorney provides a comprehensive overview of the key things to understand about the business judgment rule.

What is the Business Judgment Rule?

The Legal Information Institute (LII) explains that the business judgment rule is a long-standing and case-law derived doctrine that holds that courts provide wide discretion to the “good judgment” of corporate decision-makers. In Florida, the business judgment rule holds that courts should presume that a corporate officer or corporate director is acting in the best interests of the company.

Know the Implications of the Business Judgment Rule 

The implications that the business judgment rule has on shareholder litigation are significant. In effect, the business judgment rule holds that corporate officers and corporate directors are generally presumed to be immune from liability for losses related to a poor outcome. Corporate decision-makers have a general right to use their own “judgment” in making business decisions. They are not liable for a poor outcome simply because that judgment turned out to be flawed or misguided. The business judgment rule protect corporate officers and directors from facing liability in a shareholder lawsuit as long as they:

1. Acted in a good faith manner;
2. Use the level of care that a reasonably prudent person would have; and
3. Had a reasonable belief that they were acting in the best interests of the company. 

The Limitations of the Business Judgment Rule (Exceptions that Could Impose Liability) 

Although the business judgment rule has major implications for shareholder litigation, it is important to emphasize that it is not a full liability shield for corporate officers or corporate directors. Decision-makers are companies that are given broad discretion by courts to use their own judgment. Still, there are limitations to the business judgment rule. A corporate officer or corporate director can be held legally liable for damages sustained by a shareholder if:

• They breached their duty of loyalty to the company (bad faith); or
• They breached their duty of care to the company (negligence).

The bottom line: Courts in Florida and other U.S. jurisdictions presume that corporate decision-makers are acting in the best interests of the company. Officers and directors have the right to use their own judgment. They are only liable for shareholder damages if they acted in bad faith or they acted in a negligent manner.

 Schedule a Confidential Case Review With a Shareholder Litigation Lawyer in Florida

At Pike & Lustig, LLP, our Florida commercial law lawyers have considerable experience handling shareholder rights cases. If you have any questions about shareholder disputes and the implications of the business judgment rule, we can help. Contact us now to arrange your completely confidential case evaluation. With office locations in Miami, West Palm Beach, and Wellington, our attorneys are ready to handle all types of shareholder disputes and shareholder litigation in Southeastern Florida.

Source:

law.cornell.edu/wex/business_judgment_rule