Business Judgment Rule for Dummies

Definition: Any decision taken that is relevent to the business of the Company.

Mechanism: A four-step ‘protection-like’ scheme to safeguard the directors’ decision

making.

A director who makes a business judgment need to excercise reasonable care, skill
and dilligence1 by showing:

a) Proper purpose and in good faith (e.g. illegal activities, contrary to public policy);
b) Not having a personal interest in the subject matter;
c) Sufficiently informed about the subject matter that the director reasonably
believes to be appropriate (e.g. business reason for the transaction, impact of
the transaction on the shareholders, management’s view to the price and factors
affecting the price, fairness of the transaction); and
d) Believing that the business judgment is for the best interest of the Company.

Importance: Directors are deemed to have met their duty of care, skill and diligence if
business judgments were made by meeting the four requirements above.

1
S. 213(2), CA 2016