Business Management Basics: Understanding The Business Judgment Rule

NY Business Law

If you are starting a business, you shouldn’t worry that you will be subject to a lawsuit if things don’t work out, because, in New York, there is a legal concept called the “business judgment rule.”

Officers and directors of start-up corporations are responsible for managing and directing the business’s affairs. As the business grows, so does the level of responsibility for officers and directors.

Under the “business judgment rule,” officers and directors of a corporation are immune from liability to the corporation for losses resulting from corporate decision making within their authority that were made in good faith and decided with reasonable skill and prudence. This is significant because the recovery of any successful claim against the company will be limited to the company’s assets only.

In my experience, matters where I would argue that the “business judgment rule” come up in the context of small businesses where there is a dispute between stakeholders and in homeowner’s associations and condominium or co-op boards where members dispute a decision. These kinds of cases turn on the facts of a case. So it is important that you are clear and upfront about your situation with your attorney.

Because of the significance of this responsibility, courts in New York give a lot of deference to the decisions the directors and officers must make to operate a business.  In many cases, the decision-maker will be shielded from personal liability for a business decision reasonably made in good faith because the court does not want to frustrate the entrepreneurial spirit or to discourage people from taking management roles in growing businesses and professional endeavors.

However, the business judgment rule is not a license to act within the business for your own self-interest or to make unreasonable decisions. Officers and directors will not be shielded from liability for reckless decisions made by officers and directors, including those decisions that take business opportunities from the business for personal gain.

In the end, the law demands officers and directors of businesses act responsibly and prudently – not perfectly.
*Gene Berardelli may be contacted at:

Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.

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