What does the business judgment rule say about fraud by management?

• A. The rule does not protect fraud or misrepresentation; such acts negate the protection and may lead to liability.
• B. The rule protects any decision as long as it was made in good faith.
• C. Fraud by management is exempt if board approves after.
• D. The rule only applies to financial losses, not fraud.

Answer: (A)

The business judgment rule protects directors for their ordinary business decisions when they act in good faith, with due care, and in the best interests of the corporation, without conflicts of interest. But it does not shield fraud or misrepresentation. If management engages in fraud, that breaches fiduciary duties and falls outside the protection the rule provides, potentially creating liability. Even retrospective board approval cannot cure or validate fraudulent acts. The rule hinges on honest intent and reasonable process; fraudulent conduct is not sheltered by it.