What is the business judgment rule, and what conditions are required for protection?

• A. Shields directors for decisions made in good faith with due care and rational basis; requires absence of conflicts and informed decision-making.
• B. Protects directors regardless of care; requires approval by shareholders.
• C. Allows directors to act without any information; requires unanimous consent.
• D. Provides protections only for financial decisions; requires external audit.

Answer: (A)

The business judgment rule is a doctrine that protects directors from liability for their corporate decisions when they act with honest belief that the action will benefit the company, after a reasonably informed and careful process, and without any conflicts of interest, and the decision has a rational basis in the company’s interests. In practice, this means they must make decisions in good faith, with due care (thorough consideration, reasonable inquiry, consideration of alternatives), after obtaining and weighing relevant information, and without self-dealing or personal conflicts. Courts defer to the board’s judgment because it’s about how the decision was made, not whether the outcome was perfect; protection does not extend to reckless disreg ard of duty, bad faith, or self-serving deals, and it isn’t limited to financial choices or require shareholder approval or external audits.