What is the business judgment rule?
The business judgment rule is a legal principle intended to protect members of company bodies from liability for business decisions that later prove unsuccessful, provided that those decisions were made responsibly and in the company’s interests. It recognises that managing a business involves commercial risk and that not every unsuccessful transaction, investment or strategic decision should result in personal liability for directors or officers.
In Polish company law, the rule is reflected in the Commercial Companies Code in provisions concerning the liability of members of management boards and supervisory boards of limited liability companies and joint-stock companies. It also applies to liquidators where the relevant provisions on management board members apply accordingly. It applies where a person performs their duties loyally towards the company and makes a decision within the limits of justified economic risk, based on information, analyses and opinions that should reasonably be taken into account in the circumstances.
The business judgment rule does not mean that company officers may act without consequences. It does not protect decisions made in bad faith, in conflict with the company’s interests, without adequate preparation or in breach of law, the articles of association or the company’s constitutional documents. Its purpose is to prevent courts from assessing past business decisions solely through the perspective of their final outcome.
How does the business judgment rule work in practice?
The rule is particularly relevant when a company’s management board makes decisions involving uncertainty. These may concern investments, acquisitions, financing, entering into significant contracts, launching new products, restructuring operations, responding to market changes or settling a commercial dispute. Even a well-considered decision may lead to financial loss because of factors that could not reasonably have been predicted at the time.
When assessing whether a board member can rely on the business judgment rule, the key issue is usually the decision-making process rather than the commercial result. A company officer should be able to demonstrate that they identified the relevant risks, obtained appropriate information, considered available options and acted in the company’s best interests. Depending on the matter, this may require financial analysis, legal advice, tax advice, market research, technical opinions or external due diligence.
Proper documentation is therefore important. Management board resolutions, meeting minutes, internal memoranda, expert reports and correspondence may help demonstrate that a decision was made on an informed basis. However, documents created only after a dispute has arisen may not replace a genuine and properly conducted decision-making process.
There may be different views in practice as to how extensive the analysis should be in a particular case. The required level of diligence depends on the nature, value and risk of the transaction, the company’s financial position, the time available and the knowledge reasonably expected from a person performing a particular corporate function. A routine operational decision will not normally require the same level of review as the sale of substantial company assets or a transaction involving related parties.
When is legal advice on the business judgment rule useful?
Legal support may be advisable before making decisions that could expose members of the management board or supervisory board to claims by the company, including claims pursued by a bankruptcy trustee on the company’s behalf. This is particularly relevant where the company faces financial difficulties, considers a major acquisition, provides security for another entity’s obligations, enters into a transaction with a shareholder or group company, or plans to discontinue a key business activity.
Private investors and minority shareholders may also need advice when they suspect that a company’s officers have acted carelessly, outside their authority or in a manner contrary to the company’s interests. The business judgment rule may be relevant both when defending against liability claims and when assessing whether there are grounds for the company to bring such claims. In certain circumstances, shareholders may bring a claim on the company’s behalf.
A prompt consultation with a lawyer can help identify procedural deficiencies before a decision is implemented. It may reduce the risk of avoidable disputes, personal liability of company officers, ineffective corporate resolutions, financial losses or allegations that the decision was made without sufficient information.
Support of a law firm in matters concerning the business judgment rule may include:
- assessing management board and supervisory board decisions from a corporate liability perspective;
- preparing legal opinions for planned transactions and strategic business decisions;
- reviewing corporate governance procedures and decision-making rules;
- drafting management board and supervisory board resolutions;
- advising on conflicts of interest and related-party transactions;
- supporting due diligence processes and documenting business risk assessments;
- representing company officers and companies in disputes concerning corporate liability.
Need legal assistance concerning the business judgment rule? Contact us.