The business judgment rule reviews the process of the decision and usually not the decision's substance, even if it is a wrong or poor decision. Therefore, the business judgment rule limits judicial inquiry into business decisions. In addition, it protects directors who are not negligent in the decision making process.
In Delaware, the business judgement rule provides a presumption that in making a decision directors were informed, acted in good faith and honestly belived that the decision was in the best interests of the corporation. The business judgement rule is both a procedural guide and a substantive rule of law.
Procedurally, it is a rule of evidence placing the initial burden of proof on the plaintiff.
- If the plaintiff fails, then the business judgment rule protects the decision and the courts will not review the decision.
- If the rule is rebutted, under Delaware law the burden shifts to the defendant to prove "entire fairness" (i.e., fair dealing and fair price).
- However, even though the business judgment rule is rebutted, the plaintiff still must prove causation.
As a result of the business judgment rule, the courts will defer to the directors' decision which will not be second guessed by the courts. The courts believe they do not have the expertise, and it is not their role to make business decisions. Directors must be able to make business decisions without fear of a lawsuit because shareholders want directors to make decisions and to take risks to produce gain even though mistakes may lose money. The idea of a court second guessing business decisions and then creating liability for directors could make directors overly cautious, resulting in reduced shareholder value
Attacks on the substance of the decision are difficult given the court's reluctance to look at substance. But the court will sometimes look at the substance if there are sufficent allegations that the business judgment rule is inapplicable
There are situations in which the business judgment rule does not apply. The plaintiff shareholder must overcome the presumption of the rule.
- The rule protects mistakes, but not negligence in making a decision. Thus, if plaintiff can prove malfeasance, the business judgment rules presumption is rebutted and does nto protect the directors.
- Does not protect nonfeasance like the France case or a prolonged failure to exercise supervision or a failure to act.
- If the decision had no business purpose, or was irrational or created a no-win situation.
- If actions that were ultra vires or constituted waste are not protected.
- If there is aduty of loyalty claim that a majority of the directors had a conflict of interest by being interested of lacking independence or a lack of good faith with actual intent to harm the corporation or an intentional dereliction of duty.
- Inapplicable if there was fraud, bad faith or illegality in the decession.