Business judgment rule

The business judgment rule is a corporate law doctrine born in nineteenth-century American jurisprudence, notably formalized in the Smith v. Van Gorkom decision of Delaware in 1985. It holds that courts should not substitute their retrospective judgment for that of directors on business decisions, provided those decisions were made in good faith, on an informed basis and free of self-interest. 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 spread to many European jurisdictions, including France, where it permeates the interpretation of management fault. In the context of 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 demonstrate having consulted experts, examined alternatives and acted without conflict of interest will benefit from the presumption, reducing the claimant's chances of success. The relevance of this doctrine has extended to cyber and AI decisions: directors who documented their decision-making process regarding cybersecurity investments or the deployment of an AI system will be better protected than those who acted without a formal process, which values the traceability of technological governance decisions.

A board of directors refuses to allocate a 15-million-euro budget for a security infrastructure overhaul, despite CISO recommendations. Eighteen months later, a ransomware attack causes 80 million in losses. The D&O insurer examines whether the board's decision satisfied the business judgment rule: documented board minutes, consultation of an external firm and the absence of conflicts of interest would favor the directors; the absence of any supporting document would expose them.

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