Definition
What is Business judgment rule?
The business judgment rule is a legal doctrine under which courts generally defer to informed, good-faith board decisions made within the board’s authority and without conflicts of interest.
What it means in practice
The rule recognizes that board members must make judgment calls and that a poor outcome does not automatically make the underlying decision improper. The quality of the process—reviewing relevant facts, seeking appropriate advice, documenting deliberation, and acting for the association—often matters more than whether the decision later proves successful.
The doctrine and its requirements vary by jurisdiction. It generally does not protect fraud, bad faith, self-dealing, decisions outside the board’s authority, or a failure to become reasonably informed.
Key points for boards
- It protects a reasonable decision-making process, not a guaranteed result.
- Board members should review relevant information before voting.
- Conflicts should be disclosed and handled under applicable rules.
- Contemporaneous records help demonstrate how the board reached its decision.