Business judgment rule

In Aronson v. Lewis, in 1984, the Delaware Supreme Court gave the business judgment rule, a doctrine born in nineteenth-century American case law, the wording judges still quote: directors are presumed to have acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Courts therefore do not substitute their retrospective judgment for that of directors, as long as the decision was made under those conditions and free of self-interest. A year later, Smith v. Van Gorkom showed where the protection ends: having approved the sale of Trans Union without informing themselves, the directors lost the presumption and were held grossly negligent. The presumption is rebuttable: if a plaintiff demonstrates a breach of these conditions, the director must then prove that the decision was entirely fair. The doctrine has reached several European systems, and Germany wrote it into law in 2005 (§ 93 AktG); France has not adopted it, though courts judging management fault leave directors comparable room. Under D&O policies, the business judgment rule is the first shield for directors named in a class action or derivative suit. A director who can show having consulted experts, examined alternatives and acted without conflict of interest benefits from the presumption, and the claimant's chances drop accordingly. The doctrine now reaches cyber and AI decisions too. Directors who documented their decision-making on cybersecurity investments or on deploying an AI system will be better protected than those who acted without a formal process. That makes the traceability of technology governance decisions worth more.