What is the function of the business judgment rule for directors during financial distress?

• A. It requires unanimous board approval for all distressed transactions.
• B. The rule protects directors' decisions made in good faith with reasonable care, even in distress, absent fraud or self-dealing.
• C. It voids all director decisions during distress.
• D. It imposes personal liability for poor forecasts.

Answer: (B)

The business judgment rule protects directors when they act in good faith, with reasonable care, and in the best interests of the company, even in difficult financial times. In distress, directors may face tough, uncertain decisions about restructuring, financing, asset sales, or bankruptcy strategies. The rule recognizes that such choices involve risk and imperfect information, so it doesn’t require perfection or hindsight approval. As long as the decision is informed, made in good faith, with an honest belief it will benefit the corporation, and not tainted by fraud or self-dealing, directors won’t be liable for outcomes that later turn out poorly. This protection encourages proactive, real-time decision-making to preserve value rather than paralyzing board action with fear of liability. The other options aren’t aligned with how the rule works: it doesn’t demand unanimous board approval for distressed transactions, it doesn’t void decisions, and it doesn’t place personal liability for every bad forecast.