What legal doctrine protects corporate directors from personal liability for business decisions made in good faith?

The legal doctrine that protects corporate directors from liability for business decisions made in good faith is the business judgment rule.

The rule reflects courts’ reluctance to second-guess commercial decisions with hindsight. It generally creates a rebuttable presumption that directors acted on an informed basis, in good faith, and with an honest belief that their decision served the corporation’s interests. This protection is especially associated with claims alleging a breach of the duty of care.

The rule is not an unlimited immunity. Plaintiffs may overcome it by showing bad faith, fraud, self-dealing, a disabling conflict of interest, gross negligence, or an uninformed decision, depending on the jurisdiction and claim. Once the presumption is rebutted, courts may apply a more demanding standard of review.

Delaware corporate law is a major source of modern business-judgment doctrine. The Delaware Supreme Court’s 1984 decision in Aronson v. Lewis is frequently cited for the rule’s classic formulation. The 1985 Smith v. Van Gorkom decision is a famous reminder that directors can lose protection when their process is seriously uninformed, even when they acted without personal dishonesty.