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Business Judgment

On Behalf of | Nov 3, 2022 | Business Litigation

When a business in Tennessee is conducting its normal operations, it wants to be sure that its board of directors is not going to be questioned in every choice it makes. There is a special rule that shields the board from what might otherwise be a constant stream of lawsuits.

The Business Judgment Rule

The business judgment rule is an assumption built into business law that when a board acts, they are presumed to be acting in good faith and in the best interests of the company. Sometimes the company might make decisions that seem wrong or odd, but it takes a serious and clear breach of their fiduciary duties to the shareholders for the board to become liable for a business decision. If this rule was not in place, then boards of companies would constantly be the targets of lawsuits when they made a decision that a shareholder did not like.

Liability

While boards are required to follow their fiduciary duty, they do not need to justify their decisions. Their role both binds them to their duty while protecting their choices with the assumption of good faith. They can become embroiled in business litigation if they do something that creates a conflict of interest, like selling the company to family members, or a major lapse like ignoring criminal activity. The bar for this is quite high, but it means that the board is not immune to all potential suits.

The business judgment rule frees the board from the distraction of lawsuits as long as they do not stray into criminal or complicit activity, enabling them to make bold decisions.