Issues in Corporate Law: The Business Judgment Rule

The Delaware Corporate and Legal Services blog hosts a short piece explaining the business judgment rule, a critical component of corporate law.

We explain the rule in Chapter 20 of Business Law Basics:

Business judgment rule. The business judgment rule, articulated most famously by the Delaware Supreme Court and nearly universally accepted, states that courts will not interfere with the management of a company unless those seeking to challenge a management decision can make a preliminary, or prima facie, demonstration that a breach of fiduciary duty occurred. In such cases the burden shifts onto the company’s management to show that a challenged transaction is intrinsically fair.

When first formulated, the business judgment rule was a revolutionary concept that articulated that it was not the place of the courts to "save" shareholders from the decisions of company management, even if those decisions were fiscally unsound, as long as they were made in good faith and without breaching the fiduciary duties of care and loyalty.