Which principle protects directors from liability for errors of judgment if they acted in good faith and were informed?

Which principle protects directors from liability for errors of judgment if they acted in good faith and were informed?

• A. Business Judgment Rule
• B. Fiduciary Shield
• C. Safe Harbor
• D. Strict Liability

Answer: (A)

The principle tested is the Business Judgment Rule. In corporate governance, directors aren’t liable for every bad outcome from a decision, as long as they acted in good faith, were adequately informed, and used due care without conflicts of interest. The rule creates a presumption that a director’s decision was informed and made with a rational business purpose, so courts won’t substitute their judgment for the directors’ after the fact. It recognizes that business decisions involve risk and uncertainty, and protects directors when they take reasonable steps to inform themselves and rely on appropriate sources. The protection doesn’t apply if there’s bad faith, self-dealing, gross negligence, or a failure to inform themselves—situations where liability can attach. The other terms describe different concepts and don’t capture this standard of protecting reasonable, well-informed judgments from liability.

The principle tested is the Business Judgment Rule. In corporate governance, directors aren’t liable for every bad outcome from a decision, as long as they acted in good faith, were adequately informed, and used due care without conflicts of interest. The rule creates a presumption that a director’s decision was informed and made with a rational business purpose, so courts won’t substitute their judgment for the directors’ after the fact. It recognizes that business decisions involve risk and uncertainty, and protects directors when they take reasonable steps to inform themselves and rely on appropriate sources. The protection doesn’t apply if there’s bad faith, self-dealing, gross negligence, or a failure to inform themselves—situations where liability can attach. The other terms describe different concepts and don’t capture this standard of protecting reasonable, well-informed judgments from liability.