How the Business Judgment Rule Protects You

As a business owner, you have a dilemma or a difficulty.

On the one hand, you owe a duty to your shareholders to maximize their return on their shares, and to grow the business, and that takes making the right decisions, and running the business the right way.

On the other hand, business isn’t a science–you can do everything right, and the business can still fail. But if it does, you could get sued by your shareholders, for mismanaging the company if they feel that you have harmed the value of their stock.

The Business Judgment Rule

The good news is that you don’t have to worry too much about this, because of what is known as the business judgment rule. The business judgment rule insulates you and protects you from lawsuits by your shareholders, so long as you use–you guessed it–good business judgment, when making your decisions.

In other words, it isn’t the ultimate business result that legally matters, and you are legally allowed to make what end up as bad business decisions–shareholders cannot sue you just because their shares diminish in value, or even because the entire business goes under.

What matters is your actions, and whether you acted with care, consideration, and due diligence. The law recognizes that often, business owners do their best, but not every business can thrive, and when it does not, those business owners shouldn’t be subjected to lawsuits and liability.

So What is Good and Bad Judgment?

There is no one list of things that constitutes good business judgment, but in many ways, it’s common sense.

Courts will ask if you did any research into your decisions before making them, or whether your rationale for making or not making a given business decision, was based on common sense and good business principles. You can take risks in business–just make sure that they are risks that are well thought out, and that you can logically justify.

Haphazard, spontaneous, or poorly thought out decisions, or decisions which are not documented and approved by the proper channels according to your corporate documents are guaranteed to get you in trouble.

Fiduciary Duties

You can also get in trouble by doing things that aren’t just bad business, but which are illegal or which breach your fiduciary duties.

Examples might be self dealing, or usurping corporate opportunities, or disloyalty to your own company or being careless with company trade secrets or customer lists. Any type of fraudulent activity or engaging in activity you know to be illegal, can land you in trouble, and the business judgment rule won’t protect you.

The law assumes that you are making good business decisions, and that means that anybody seeking to sue you or the business for poor judgment, has the burden to prove to the court that you did not use good business judgment.

Need to bring or defend against a shareholder derivative lawsuit?  Call our Fort Lauderdale business lawyer at Sweeney Law P.A. at 954-440-3993 for help.

Sources:

floridabar.org/the-florida-bar-journal/the-business-judgment-rule-in-florida-on-paper-and-in-the-trenches/

leg.state.fl.us/STATUTES/index.cfm?App_mode=Display_Statute&Search_String=&URL=0600-0699/0607/Sections/0607.0831.html