The Business Judgment Rule in California: What It Protects and What It Does Not

Last updated: November 2026

The business judgment rule in California protects a corporate director from liability for a decision made in good faith, with reasonable care and inquiry. The director must believe the decision is in the best interest of the corporation and its shareholders. (Corp. Code, § 309, subds. (a), (c).) The rule does not protect decisions tainted by a conflict of interest, improper motive, or a failure to inquire. Kolmogorov Law, P.C. litigates on both sides of the rule for shareholders, directors, and managers in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss whether a board decision can be challenged or defended.

What Corp Code 309 says about the business judgment rule

Section 309 sets the standard. A director must perform the duties of the office in good faith and in a manner the director believes to be in the best interests of the corporation and its shareholders. The director must also use such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (Corp. Code, § 309, subd. (a).)

The statute then tells directors what they may rely on. A director is entitled to rely on reports, opinions, and financial data prepared by officers or employees the director believes to be reliable and competent. The same goes for counsel, accountants, or other experts within their competence, and for board committees the director believes merit confidence. (Corp. Code, § 309, subd. (b).) Reliance is protected only if the director acts in good faith, makes reasonable inquiry when the circumstances indicate a need for it, and has no knowledge that would make the reliance unwarranted.

A director who meets that standard has no liability based on an alleged failure to discharge the director's obligations. (Corp. Code, § 309, subd. (c).)

Two rules in one

California courts describe the business judgment rule as having two components. The first immunizes directors from personal liability when they act in accordance with the rule, and that is the part section 309 codifies. The second is a judicial policy of deference: courts will not second-guess management decisions made by directors in good faith in what they believe is the organization's best interest. (Berg & Berg Enterprises, LLC v. Boyle (2009) 178 Cal.App.4th 1020, 1044-1045.)

The practical effect is a presumption that a director's decision rests on sound business judgment. A court will not substitute its own judgment when the decision can be attributed to any rational business purpose.

What the rule does not protect

The presumption has limits. The rule does not shield actions taken without reasonable inquiry, with improper motives, or as a result of a conflict of interest, and an exception exists in circumstances that inherently raise an inference of conflict. (Berg & Berg Enterprises, LLC v. Boyle, supra, 178 Cal.App.4th at pp. 1045-1046.)

A director who votes to approve a contract with a company he owns is not making a protected business judgment. Neither is a board that approves a transaction without reading the documents or asking the questions the circumstances called for. And a decision made to entrench the majority or punish a dissenting shareholder is a decision with an improper motive.

The plaintiff must plead these facts specifically. Conclusory allegations of improper motive or conflict are not enough. A general allegation that the board failed to investigate fails unless the complaint alleges facts that called for an investigation. (Berg & Berg Enterprises, LLC v. Boyle, supra, 178 Cal.App.4th at pp. 1045-1046.) Because the sufficiency of those allegations is a question of law, the defense can be raised by demurrer at the start of the case.

How it comes up for business owners

A corporation's board approves an acquisition after a short presentation by the CEO. The deal fails and a minority shareholder sues. If the board obtained financial projections, consulted counsel, and asked questions, the rule protects them even though the outcome was bad.

A family corporation's board, consisting of the majority owners, sets their own salaries at a level that absorbs the profit and leaves nothing for dividends. The decision benefits the people who made it. That is the conflict-of-interest exception, and the minority shareholder rights page explains the remedies.

Exculpation clauses in the articles

Articles may include a provision eliminating directors' personal liability for monetary damages in suits brought by or in the right of the corporation for breach of the duties in section 309. (Corp. Code, § 204, subd. (a)(10).) The statute lists what such a clause cannot cover. The list includes intentional misconduct or a knowing and culpable violation of law, acts involving an absence of good faith, and transactions from which the director derived an improper personal benefit. It also includes reckless disregard of a known risk of serious injury and an unexcused pattern of inattention amounting to abdication. (Corp. Code, § 204, subd. (a)(10)(A).) Nor can the clause protect an officer for acts taken as an officer. (Corp. Code, § 204, subd. (a)(10)(C).)

An exculpation clause helps a careless but disinterested director. It does nothing for one who had a conflict.

Using the rule on each side

For a shareholder plaintiff, the work happens before filing. We use the inspection statute to get the board minutes, the materials the board received, and the related-party disclosures, as described on our shareholder inspection rights page.

For a director or board defendant, the rule is the first line of defense. A record showing that the board received information, deliberated, and relied on advisors supports a demurrer or an early summary judgment motion. The fiduciary duty guide covers the related duty of loyalty, which the rule does not reach.

Where these cases are heard

Claims against directors are filed in the Superior Court of the county where the corporation has its principal office: the Central Justice Center in Santa Ana for Orange County companies, the Stanley Mosk Courthouse in Los Angeles.

What to bring to the first meeting

The articles and bylaws, including any exculpation or indemnification provision. The minutes and board materials for the decision in question. Any valuation, legal opinion, or financial report the board received. The cap table and a list of any relationship between a director and the other side of the transaction.

Frequently asked questions

What is the business judgment rule in California?

A rule, codified at Corporations Code section 309, that protects a director who acts in good faith, with reasonable care and inquiry, in what the director believes is the corporation's best interest. Such a director has no liability for the outcome of the decision. (Corp. Code, § 309, subds. (a), (c).)

Does the business judgment rule protect self-dealing?

No. The rule does not shield actions taken as a result of a conflict of interest, with improper motives, or without reasonable inquiry. (Berg & Berg Enterprises, LLC v. Boyle, supra, 178 Cal.App.4th at pp. 1045-1046.) A director on both sides of a transaction must look to disclosure and disinterested approval, not to the rule.

Can I sue a director for a bad business decision?

Only if you can plead facts showing the decision was made without reasonable inquiry, in bad faith, or under a conflict. A decision that was informed, disinterested, and made in good faith is protected even if it lost money.

Does the business judgment rule apply to LLC managers?

Not directly. Section 309 governs corporate directors. LLC managers owe a statutory duty of care limited to avoiding grossly negligent or reckless conduct, intentional misconduct, or knowing violations of law, as modified by the operating agreement within statutory limits. (Corp. Code, § 17704.09, subd. (c).)

What is Corp Code 309?

The Corporations Code section that sets the standard of care for directors and lists what they may rely on. A director who meets the standard has no liability for an alleged failure to discharge the director's obligations. (Corp. Code, § 309, subds. (a)-(c).)

Talk to a California shareholder and director dispute attorney

If you are challenging or defending a board decision, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is at 327 Magnet, Irvine, CA 92618, and represents shareholders, directors, and managers in Orange County, Los Angeles, and throughout California. See also our partnership dispute attorney page, our business lawyer for corporations page, and the fiduciary duty guide.

This page provides general information about California law and is not legal advice. Outcomes depend on the articles, the board record, the facts, and the court.