The Business Judgment Rule Protects You When You Make Corporate Decisions
If you are in any position of authority in your company, you are expected to make a lot of decisions about the workings, direction, and activities of your company. Some of those decisions will turn out to be good, profitable ones. But not all of them. When you make a decision that turns out to be wrong, can you be sued?
Shareholder Derivative Suits
As a general rule, it is legally possible for an owner, shareholder or officer of a company to be sued by the company’s shareholders. That is called a shareholder derivative lawsuit. It is a lawsuit that alleges that you are acting against the best interests of the company, and as such, you are hurting the company, and the shareholders’ interests in the company.
But the law recognizes that not every business decision will always be the right one. It wouldn’t be fair for a corporate officer to face legal liability, just because he or she made a decision that turned out not being a good one-people make bad decisions all the time, and they don’t get sued.
The Business Judgment Rule
So long as you are acting in good faith in the decisions that you make, you generally cannot be sued, even if those decisions end up being wrong. This is called the business judgment rule. To show that you are acting with good judgment, you must show that:
1) You did not receive any personal benefit from anything that you decided to do or not do—that is, that you had the interest of the company in mind, not your own personal interests
2) You used the same care that someone else in a similar situation as you, would have used and that you acted in good faith.
Simply making a mistake—or even being somewhat careless—won’t get you in legal trouble.
People can face legal problems when they just grossly ignore their duties, or they act with their own interest in mind, or they do something that they know will hurt the company. Violating an obligation of trust and loyalty to the company could get you in trouble as well.
The law even presumes that you are acting in good judgment—it is on those that seek to challenge you, that must show that you are not protected by the business judgment rule.
Only Protection from Legal Liability
Note that all of this only protects you from legal liability for the decisions you make as a corporate officer or owner. It does not protect your actual job—in other words, someone can still be removed as an officer, or partner, or they could be fired by the board of directors, regardless of whether they use good judgment or not. The business judgment rule only protects you from financial liability to the company and shareholders for the decisions that you may have made.
Call our Fort Lauderdale business law lawyers at Sweeney Law P.A. at 954 440-3993 for help if you have a business or commercial litigation problem.