Business Judgment Rule

The business judgment rule (BJR) is a judicial presumption developed primarily in U.S. state corporate law — most influentially by the Delaware courts — that directors of a corporation act on an informed basis, in good faith, and in the honest belief that their action is in the best interests of the company. When the presumption holds, courts will not second-guess the substantive wisdom of a board's decision, even if it turns out badly.

The doctrine reflects a policy choice: judges are poorly placed to evaluate complex commercial trade-offs after the fact, and exposing directors to hindsight liability would discourage risk-taking and qualified service on boards. The rule applies to decisions — not to inaction or to conflicted transactions, which are reviewed under stricter standards such as the entire fairness test.

Key Delaware cases shaping the rule include:

• Aronson v. Lewis (Del. 1984), which articulated the classic formulation of the presumption and its rebuttal.
• Smith v. Van Gorkom (Del. 1985), which held that directors of TransUnion breached their duty of care by approving a merger without adequate deliberation, showing the rule can be overcome by gross negligence in the decision-making process.
• In re Caremark International Inc. Derivative Litigation (Del. Ch. 1996), which addressed director oversight duties.

To invoke the rule, directors generally must show they had no disqualifying conflict of interest, were reasonably informed before acting, and exercised judgment rationally. Plaintiffs can rebut the presumption by showing fraud, illegality, self-dealing, waste, or gross negligence.

Although rooted in U.S. law, analogous principles appear in the UK (Companies Act 2006, s.172 duty to promote success of the company), Germany (§ 93(1) AktG, codified after the ARAG/Garmenbeck decision), and Australia (Corporations Act 2001, s.180(2)). For IR and policy researchers, the BJR is relevant when analyzing corporate governance reform, ESG litigation, and sovereign wealth fund or state-owned enterprise accountability debates.