How does the business judgment rule interface with cases of fraud or misrepresentation by management?

• A. It protects directors even if fraud occurred.
• B. It protects only if directors have no conflicts of interest.
• C. It does not protect fraud or misrepresentation; such acts negate the protection.
• D. It requires court approval for decisions involving fraud.

Answer: (C)

The business judgment rule shields directors only when they act in good faith, with due care, and in the corporation’s best interests. Fraud or misrepresentation by management breaks that standard. If management engages in deceit, self-dealing, or illegal acts, the decision-making process is tainted and the duty of loyalty and the duty to act with care aren’t satisfied. Because BJR rests on a presumption of honest, informed decision-making, fraud undercuts that presumption, so the protection does not apply. In those circumstances, directors (and the company) can face liability for fraud or breach of fiduciary duties. The rule isn’t a blanket shield for any decision, nor does it require court approval for fraud; it simply doesn’t apply when fraud is present.