What is the function of the business judgment rule in times of financial distress?

• A. It protects directors' decisions made in good faith with reasonable care, even in distress, absent fraud or self-dealing.
• B. It requires directors to liquidate assets in distress.
• C. It allows managers to override fiduciary duties during crisis.
• D. It imposes a higher standard of care in distress than in normal times.

Answer: (B)

The function of the business judgment rule in times of financial distress is to protect directors from liability for decisions that turn out poorly, as long as those decisions were made in good faith, with due care, and without conflicts of interest or fraud. Even in a crisis, directors are expected to exercise informed, rational business judgment—considering options like debt renegotiation, asset sales, or restructuring—without fear of second-guessing if their process was sound.

This means liquidation isn’t a requirement of the rule; it’s not about overriding fiduciary duties or raising a higher standard of care during distress. Rather, it acknowledges that in tough times, outcomes can be uncertain, but the court won’t substitute its own view of business strategy for the directors’ if the decision was made with appropriate care and integrity.