Under the business judgment rule, which condition defeats its protection?

• A. Decisions made with conflicts of interest or failing to exercise due care.
• B. Decisions made with good faith but with conflicts.
• C. Decisions made in bad faith but with due care.
• D. Decisions made in good faith, with due care, and with rational basis, in the absence of conflicts.

Answer: (D)

The key idea is that the business judgment rule protects directors when they act with good faith, due care, and a rational business purpose, and when there are no conflicts of interest. The protection disappears as soon as any of those requirements fail. A conflict of interest defeats the rule because personal or competing interests can steer the decision away from the corporation’s best interests, even if the directors act with honesty. Bad faith defeats it because decisions taken with fraudulent intent or a clear motive to harm the company undermine fiduciary duties. Likewise, failing to exercise due care—acting with gross negligence or a reckless disregard for duties—removes the shield.

So, the only scenario in which protection remains is when the directors act in good faith, with due care, and with a rational basis, in the absence of conflicts. Any statement that notes conflicts, bad faith, or lack of due care describes a condition that defeats the protection.