Business Mismanagement
& Business Judgment Rule

In 2019, about 428 class action securities cases were filed across federal and state courts in the United States. Business owners and corporate directors involved in business management have a fiduciary duty to the company and its shareholders and may be held liable for mistakes in business judgment. Fortunately, the business judgment rule provides company directors with protection from liability stemming from decisions they made provided that they acted in good faith.

If you're trying to understand California's business judgment rule and how it allows you to make decisions in the best interest of your business, it is important that you consult with a knowledgeable business litigation attorney. Attorney David Schwartz provides comprehensive representation to business owners and corporate directors facing litigation. Mr. Schwartz can examine your unique situation and help you understand how applicable laws protect you from personal liability.

The Law Offices of David H. Schwartz proudly serves clients throughout San Francisco, Alameda County, Santa Clara, Oakland, San Mateo, and the San Francisco Bay Area of California.

Brief Overview of California's
Business Judgment Rule

California's business judgment rule is a legal doctrine that offers protection from "honest mistakes" made by those involved in the day-to-day operations of a business. Whether you own the company, are a member of the company's board, or hold an executive or leadership role within the corporation, the business judgment rule may protect you from personal liability from class-action lawsuits brought against the company.

Director Protection against Personal Liability

According to the rule, a director or business owner is not liable for a mistake in business judgment that was made in good faith and that they believed was in the best interest of the corporation when the director:

  1. Exercised Due Care: Exercised the care that a similarly situated prudent individual would have taken, including making reasonable inquiries before making their decision.
  2. Relied on Trusted Sources: Relied on information, including data, opinions, reports, and financial statements from: 
    1. Officers or employees of the corporation that the director deems reliable and knowledgeable about matters addressed.
    2. Experts on the subject matter, such as legal counsel or accountants.
    3. A committee of the board that the director is confident in their knowledge but of which the director does not serve on matters within the committee's authority. Information obtained from a committee should be used only after reasonable inquiry, where needed, and only in good faith.
  3. Followed Established Guidelines and Standards: A director who follows these guidelines in obtaining and utilizing information in making their decision, "shall have no liability based upon any alleged failure to discharge the person's obligations as a director…" (California Code, Corporations Code - CORP § 7231).

Corporate Management Protection for Decisions

Additionally, the business judgment rule protects a company's board of directors for exercising business decisions appropriately, using their discretion. The rule assumes that directors are in the best position to judge whether a particular business transaction is helpful to the company's affairs and can help achieve their goals. As long as there is no violation of trust, breach of fiduciary duty, fraud, or conflict of interest, the California courts will generally support the company's board of directors.

Alleged Wrongdoings

The presumption created by California's business judgment rule can be refuted for affirmative allegations of wrongdoings, such as:

  • Fraud
  • Acting in bad faith
  • Unreasonable failure to investigate material facts

In the event of alleged wrongdoing, the corporation's board of directors may appoint a special litigation committee of independent directors to investigate the challenged business transaction. To establish the special litigation committee defense, the corporation must prove that the committee members conducted an adequate investigation. The traditional summary judgment rules may apply when the special litigation committee defense reaches the trial court.

How the Law Offices of David H. Schwartz Can Help

California's business judgment rule was established based on the understanding that no one is perfect. Directors can make unfortunate mistakes or unpopular business decisions. If a director is making an honest effort to promote the company's best interests, but the consequences of the director's decision are unacceptable, this may result in a lawsuit from shareholders. Having a knowledgeable business litigation attorney on your side is crucial to protect your rights and for proper guidance.   

For over 45 years, Attorney David H. Schwartz has been handling legal matters as it pertains to business management. Using his extensive understanding of California's business judgment rule, Mr. Schwartz can help protect you and your business from personal liability. He will evaluate your unique situation and determine your best defense against business mismanagement claims brought against you. 

Contact the Law Offices of David H. Schwartz today to schedule a one-on-one consultation with an experienced California business litigation attorney. Mr. Schwartz can fight aggressively on your side to protect your rights and your business. Attorney David H. Schwartz proudly represents business owners and corporate directors throughout San Francisco, Alameda County, Santa Clara, Oakland, San Mateo, and the San Francisco Bay Area of California.


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