The Business Judgment Rule and Business Divorce

When you are planning to go through a business divorce, you should understand how the business judgment rule may impact your actions. The business judgment rule is a legal doctrine affecting corporate directors and officers. When making business decisions for a corporation, directors’ and officers’ reasoning could be called into question. This rule provide a shield against accusations of wrongdoing – to a point.

What Is the Business Judgment Rule?

The business judgment rule protects a corporation’s directors and officers when they make decisions on the corporation’s behalf. The rule shields them against legal liability for alleged breaches of duty to the corporation. It only applies if the acts they committed were “within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.” Sneed v. Webre, 465 S.W.3d 169, 178 (Tex. 2015). In other words, the director or officer must have made a business judgment about whether to commit some act.

The business judgment rule does not apply if the director or officer acted dishonestly, fraudulently, or by self-dealing. It only applies when an action is taken in good faith on the corporation’s behalf. Plaintiffs seeking to hold directors or officers accountable must claim that more than “mere mismanagement” or unwise decisions occurred. Id. Moreover, directors and officers can delegate day-to-day decisions to employees or outside professionals.

It’s important to note that directors and officers have fiduciary duties to a corporation, not to its shareholders. Directors and officers are not obligated to act in a way that would benefit an individual shareholder if the shareholder’s interests don’t align with the corporation’s interests. See Estate of Poe, No. 20-0178 (Tex. June 17, 2022). Instead, they must act in the best interest of the corporation. If their judgment is questioned, the business judgment rule may protect them from liability.

The Business Judgment Rule and Business Divorce

You may be wondering how the business judgment rule applies in a business divorce situation. If you run a small corporation or other type of business, you may regularly make decisions on the business’s behalf. During a business divorce, you and other corporate stakeholders could disagree about how best to break up the business. As you try to move forward, remember that your decisions and others’ must be made in the corporation’s best interest. Even if someone disagrees with a decision you make, you may have legal protection from the business judgment rule.

For example, you may be trying to decide whether to sell your business and to whom. To fulfill your fiduciary duties, you may need to obtain a business valuation. You also may need to solicit several offers to buy the business and compare them to each other. You may need to confer with the other corporate directors and officers about which sale offer to choose. Once you make a decision, the business judgment rule will likely apply to protect you from legal liability – unless the decision was made in bad faith or involves self-dealing.

When you are a corporate stakeholder, a business divorce can involve many moving parts. You need legal advice to protect yourself against any claims of bad faith or wrongdoing as you wrap up the business. The business judgment rule is only one tool you can use. Reach out to experienced business divorce lawyers for advice on your legal obligations and rights. Our firm can give you the knowledge you need to confidently proceed with the business divorce.

Business Divorce Lawyers Here for You

Our experienced Houston business divorce lawyers help our clients find the best solution possible. At Henke & Williams, LLP, our advice is never “one-size-fits-all”. We tailor business divorce solutions to your needs and we advise on your specific legal issues. To set up a consultation, call 713-940-4500 or use our convenient Contact Form.

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