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How Does the Business Judgment Rule Work?

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Orange County business lawyers provide representation to those involved in running a company who end up facing a lawsuit. This includes those who own companies, who are on company boards, and who are in leadership or executive roles within corporations and other professional organizations.

Company owners and corporate executives are among the individuals who have a fiduciary duty to the company and to shareholders. Those in a position of power within a business organization are expected to act in the best interest of the company and to ensure they are not taking actions that undermine the interest of the business. If a director, company officer, executive or other person involved in the business violates his fiduciary duty, he or she could be sued.

This is just one example of how a person with authority in a company could end up facing a personal lawsuit, even when a company is incorporated so basic protections from liability are in place. The risk of personal liability can be a big downside to having a high-level position in a company or owning a business, but there are protections in place to help keep those in powerful positions safe from losing money and property unless they did something wrong.

One example of a type of protection that is in place is called the business judgement rule. The business judgment rule can protect directors and other company leaders from facing personal liability from certain actions taken and certain decisions that have been made in the course of company operations. Brown & Charbonneau, LLP can provide you with information on whether the business judgement rule could help to protect you from being held responsible for damages, and can assist you in making an argument that the business judgement rule should apply in your particular situation. Give us a call today to find out more.

What is the Business Judgment Rule?

The San Diego Bar Association explains what the business judgment rule is. Essentially, it is a legal doctrine that provides “protection from honest mistakes” for those who are involved in the operations of a company.

Within California, there is both a statute that provides immunity for corporate directors under the business judgement rule, and there are a series of court decisions that have created common law protections from liability in situations where directors act in accordance with what they believe are a company’s best interests.

A director or business leader who is sued for a decision that was made or an action that he took on behalf of the company that ended up resulting in losses or in harm to the business could assert that the business judgment rule protects him from being held legally liable for the damage his actions caused. Without the business judgement rule, making decisions on behalf of a company would be very high-risk because a choice that turns out to be a poor decision could destroy personal wealth.

How can the Business Judgment Rule Protect You?

Those who have been sued for the actions that they took in operating a business will need to prove that the business judgement rule protects them from liability for a particular decision. There are specific standards established by California code sections 309 and 7231 which determine whether or not the statutory business judgment rule provides protection from liability.

For example, in order for the business judgment rule to protect a director’s decisions or actions, the director must have acted in “good faith” and must have acted in a manner the director believes was in both the company’s best interests and the shareholder’s best interests. The director must have exercised reasonable care, as judged by what an ordinary person would have done, in making sure that he researched his decisions.

Directors are allowed to rely on information and advice from corporate officers or employees that the director reasonably believes are reliable, as well as to rely on outside professions that the director believes are competent. Directors can rely on financial statements and committees as well, as long as the director has a good faith believe in their competence and correctness.

Getting Help from Orange County Business Lawyers

The specifics of what you must prove to claim the business judgment rule protects you from liability will vary depending upon whether you are trying to avoid a claim against you by citing California’s statute or by citing common law from past cases. Brown & Charbonneau, LLP represents individuals as well as large and small companies in cases involving all forms of business disputes. If you are involved in a business dispute, or would like to learn about your rights and how to protect them, we can provide you with the information you need. Contact us or call today at 714-406-4397 to schedule a consultation and learn more about how we can help you.

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