Rare insights from the Federal Court on the business judgment ruleThe ‘business judgment rule’ recognises the inherent risks associated with making business decisions and that bad outcomes do not necessarily mean that directors have breached their duty. Since it was incorporated into the Corporations Act 2001 (Cth) (Act) 15 years ago, it has been seldom invoked. Nevertheless, while its practical relevance has arguably been limited, the business judgment rule has proven to be a successful defence in a recent decision of the Federal Court.
The business judgment ruleThe business judgment rule means a director is taken to have met their duty of care and diligence if they:
- make the judgment in good faith, and for a proper purpose
- do not have a material personal interest in the subject matter of the judgment
- inform themselves about the relevant subject matter to the extent they reasonably believe to be appropriate, and
- rationally believe that the judgment is in the company’s best interests.1