MBE Rules · Business Associations
Business Judgment Rule
Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020
The rule
A director's business decision is presumed to have been made on an informed basis, in good faith, and in the honest belief that the action was in the best interests of the corporation. Absent a breach of loyalty, care, or good faith, courts will not second-guess the decision.
In plain English
The Business Judgment Rule protects directors of a corporation by presuming that their decisions are made with care, in good faith, and in the best interests of the company. Courts generally won't interfere with these decisions unless there is evidence of a breach of loyalty, care, or good faith.
Worked example
A corporate director decides to invest in a new technology that the board believes will increase profits. After conducting thorough research and consulting with experts, the director votes in favor of the investment. Later, the investment fails, but the court finds that the director acted in good faith and made an informed decision, so the Business Judgment Rule protects the director from liability.
Memory hook
Directors get a free pass unless they act disloyally, carelessly, or in bad faith.
The trap
Exams may present scenarios where a director's decision seems questionable, but students must remember that as long as there is no breach of loyalty, care, or good faith, the decision is protected.
How examiners test it
Questions often include fact patterns where a director's decision leads to poor outcomes, testing whether students recognize the application of the Business Judgment Rule to shield the director from liability.
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