California Corporations Code 309 - Business Judgment Rule
"'The common law "business judgment rule" refers to a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions.
The business judgment rule is premised on the notion that those to whom the management of the corporation has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is one which is "'"helpful to the conduct of corporate affairs or expedient for the attainment of corporate purposes . . .,"'" and establishes a presumption that directors' decisions are based on sound business judgment. Under this rule, a director is not liable for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.'" (Barnes v. State Farm Mut. Auto Ins. Co. (1993) 16 Cal.App.4th 365, 378-379.)
In California, the business judgment rule is codified in section 309 of the Corporations Code.
Section 309 of the Corporations Code provides:
"(a): a director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
"(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:
"(1) One or more officers of employees of the corporation whom the director believes to be reliable and competent in the matters presented.
"(2) Counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence.
"(3) a committee of the board upon which the director does not serve, as to matters within its designated authority, which committee the director believes to merit confidence, so long as . . . the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.
"(c) a person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person's obligation as a director. . . ."
"In most cases, the presumption created by the business judgment rule can be rebutted only by affirmative . . . facts that would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.
Interference with the discretion of directors is not warranted in doubtful cases." ( Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715.)
When unrebutted evidence shows the directors acted in good faith and made a reasonable investigation, they are insulated from liability and entitled to judgment as a matter of law. ( F.D.I.C. v. Castetter (9th Cir. 1999) 184 F.3d 1040, 1044, 1046 interpreting Corporations Code section 309.)