Legal Blogs

What Does the Business Judgment Rule Mean?

Shareholder disputes can arise whenever owners of shares of a company believe that the co-owners, board members, or executors are not doing the right things for the company. In some cases, disputes may arise because of a claim that someone in a position of authority is not fulfilling his fiduciary responsibility to act in the best interests of the business. Disputes can also arise for a wide variety of other reasons. shareholder disputes

When shareholder disputes arise, a claim may be made that one or more co-owners, board members, or executors has done something wrong and should thus be held accountable. When this happens, the person(s) accused of wrongdoing will need to raise defenses if the co-owners who have brought the claim can successfully prove there was a problem.

While the burden is on the shareholders claiming the breached fiduciary duty or other wrongdoing to prove their claim, those accused of wrongdoing should talk with a business litigation lawyer to explore all of their options for fighting the accusations against them.

Brown & Charbonneau, LLP can provide extensive assistance to those who are involved in shareholder disputes. Whether you are initiating a claim alleging a breach of fiduciary duty or other wrongdoing, or whether you are defending against accusations which have been made against you, our legal team is here to help.  One of the possible ways that we can assist you in fighting accusations of wrongdoing is to raise the business judgment rule as part of your defense. 

The Business Judgment Rule & Shareholder Disputes

Section 309 of the Corporations Code in California contains a rule commonly referred to as the “business judgment rule.”  According to the relevant code section, a person who performs his duties as a director and acts in what he believes to be the best interest of the corporation “shall have no liability based upon any alleged failure to discharge the person’s obligations as a director.”

Essentially, this rule protects people who own and operate companies from being held liable whenever a decision turns out to be a bad one. No one would want to work in a position of authority and make difficult decisions if they could be personally held liable every time the company happens to lose money. There is always an element of the unexpected in terms of how a decision will turn out, and co-owners, board members, and executives should not be penalized if they made a decision they believed was in a company’s best interests and the outcome turned out to be a bad outcome.

In order to determine if the director carried out his duties and is thus protected by the business judgment rule, the key question is whether he acted in good faith, in a manner he believes to be in the company’s best interest, while exercising reasonable care- including reasonable inquiry.

In other words, the availability of the business judgment rule as a defense will depend upon whether you did your due diligence when you made a decision, and whether you used the information available to you to make a decision that made sense for the company under the circumstances. If you acquired appropriate information, took an action you believe was right for the company, and the outcome turned out to be bad, the business judgment rule can protect you from being held accountable for losses and damages that resulted.

When doing your due diligence, you are expected only to make reasonable inquiry. Directors are entitled to rely on opinions, information, statements, reports, and financial data prepared by other officers or prepared by employees if the director believes the information is reasonably reliable. The director is also allowed to rely on independent accountants, counsel, and other third parties including board members, if the director believes that the information he is relying on was prepared by a person within his professional area of expertise.

Getting Help with Irvine Shareholder Disputes

Determining whether the business judgment rule is a viable defense in shareholder disputes or not is going to depend upon many different factors. An experienced Irvine business litigation lawyer can assist you if you have become involved in a dispute with shareholders of a company and if you are being accused of wrongdoing.

We can carefully review the allegations that have been made, as well as the actions that you took, to decide on the best ways for you to defend yourself and reduce the chances of being found liable for losses.

To learn more about how we can help and to get started on defending yourself in Irvine shareholder disputes, give us a call at (866)237-8129 or contact us online.