The Duty of Care and the Business Judgment Rule: every key term you need (+ practice quiz)
25 flashcard terms for Business Associations Topic 5, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A director must act in good faith, with the care an ordinarily prudent person in a like position would use, and in a manner reasonably believed to be in the best interests of the corporation.
Business judgment rule
A presumption that in making a decision the directors acted on an informed basis, in good faith, and in the honest belief that the action served the corporation, shielding the merits from judicial review.
Rebutting the business judgment rule
A plaintiff must plead facts showing the directors were uninformed, interested, disloyal, acted in bad faith, or failed to act at all, after which the burden shifts to the board to prove entire fairness.
Gross negligence standard
Delaware measures the informational component of a board decision by gross negligence rather than ordinary negligence, asking whether directors informed themselves of all material information reasonably available.
Smith v. Van Gorkom
The Delaware decision holding directors grossly negligent for approving a cash-out merger after a two-hour meeting with no valuation study and no reading of the agreement, despite a large premium.
Informed decision process
Boards protect themselves by allowing time for review, obtaining a fairness opinion, questioning management projections, documenting deliberations, and reserving the right to consider competing bids.
Reliance on experts and officers
A director may rely in good faith on reports from officers, board committees, counsel, and accountants selected with reasonable care, unless the director has knowledge making reliance unwarranted.
Exculpation charter provision
Authorized by DGCL 102(b)(7) and the MBCA, it eliminates director money damages for care violations but never for loyalty breaches, bad faith, intentional misconduct, or improper personal benefit.
Corporate waste
An exchange so one sided that no business person of ordinary sound judgment could conclude the corporation received adequate consideration; the claim survives shareholder ratification only if unanimous.
Duty of oversight
Directors must make a good faith effort to install a reporting system and then to monitor it; the claim is often the hardest theory of liability in corporate law to plead successfully.
Caremark claim
An oversight claim requiring proof that directors utterly failed to implement any reporting system, or having implemented one consciously disregarded its warnings, thus acting in bad faith.
Stone v. Ritter
The Delaware decision confirming that Caremark oversight liability is a species of the duty of loyalty because it requires scienter-level bad faith, so exculpation clauses do not protect the directors.
Red flags
Warning signs such as regulatory findings, whistleblower complaints, repeated audit failures, or press reports whose conscious disregard converts inattention into an actionable bad faith failure to act.
Mission critical compliance
Recent Delaware cases sustain oversight claims where a board kept no board-level system for the central safety or regulatory risk that defines the company's business.
Compliance program
A structure of policies, reporting lines, training, audits, and board-level committee review that both prevents wrongdoing and evidences the good faith effort Caremark demands.
Director duty to inquire
Directors must attend meetings, read financial statements, ask questions about irregularities, and resign or object formally if the board persists in a course they cannot cure.
Francis v. United Jersey Bank
The New Jersey case holding an inattentive director liable where basic reading of the financial statements would have revealed that family officers were looting client trust funds.
Board authority under DGCL 141(a)
The business and affairs of a corporation are managed by or under the direction of the board unless the certificate of incorporation validly provides otherwise, the source of centralized management.
Board committees
Directors may delegate to committees such as audit, compensation, and nominating, but delegation does not relieve the full board of its own duty to supervise and to inform itself.
Officer fiduciary duties
Officers owe the same duties of care and loyalty as directors, but they are not covered by charter exculpation for their own care breaches under longstanding Delaware law.
Mandatory indemnification
A corporation must indemnify a director or officer who prevails on the merits or otherwise in defending a proceeding brought by reason of the person's corporate role.
Permissive indemnification
A corporation may indemnify one who acted in good faith and reasonably believed the conduct was in or not opposed to the corporation's interests, but not for amounts paid to settle a derivative claim absent court approval.
Advancement of expenses
Payment of defense costs as they are incurred, on an undertaking to repay if indemnification is ultimately unavailable, often made mandatory by bylaw to attract qualified directors.
Directors and officers insurance
Policies that fund defense costs and settlements, including the side reserved for individuals where the corporation cannot indemnify, and a common practical limit on personal exposure.
Causation in duty of care claims
Even a grossly uninformed decision produces damages only if the process failure caused loss, and Delaware analyses often merge causation into the entire fairness price inquiry.