The Business Judgment Rule Under Illinois Law

The business judgment rule is one of the most important defenses available to Illinois corporate officers and directors facing liability for breach of fiduciary duty. Experienced breach of fiduciary duty defense attorneys often assert the business judgment rule as a legal basis for dismissing lawsuits at the pleading stage.

The business judgment rule is a corporate law doctrine derived from case law that provides a defense to corporate officers, directors, managers, and agents of a business against personally liability. Under Illinois law, the business judgment rule presumes that corporate officers have made decisions affecting the company in good faith and in the honest belief that their decisions were in the best interest of the company.

Under the business judgment rule, corporate agents are not held personally liable for actions that they take in the ordinary course of business so long as they have acted in good faith. The rule is meant to protect corporate decision-making from judicial second-guessing and well-meaning directors who simply ended up making the wrong decision from personal liability. Overcoming the business judgment rule creates the potential for holding officers personally liable if plaintiffs can prove that the officers were not acting in good faith.

Directors and officers make thousands of decisions on behalf of their companies. Some decisions turn out to be good decisions and the shareholders profit. Some decisions turn out to be the wrong decisions though. In such cases, shareholders increasingly turn to derivative actions alleging breaches of fiduciary duties in an effort to recoup corporate losses. The officers of a corporation owe the corporation and its shareholders various fiduciary duties in the exercise of their duties. When a shareholder in a derivative lawsuit alleges that the officers have breached these fiduciary duties, Illinois courts will evaluate the officers’ conduct based on the business judgment rule. If the court determines that the corporate officers have properly exercised their business judgment, the court will not find that the officers breached their fiduciary duties.

When it comes to determining whether or not an individual properly exercised his or her business judgment, the court will look to see if the officer or director exercised due care in the performance of his or her duties. Illinois case law defines due care as “becoming sufficiently informed to make an independent business decision.”

So long as the officer or director has exercised due care, the business judgment rule protects their business decisions from liability. In becoming sufficiently informed, corporate directors and officers are 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 or employees of the corporation believed to be reliable and competent in the matters presented;
2. Counsel, independent accountants or other persons believed to be within their professional or expert competence; and
3. A committee of the board upon which the director does not serve, as to matters within its designated authority, believed to merit confidence.

Time and again Illinois case law as reiterated that the business judgment rule is very difficult to overcome. Accordingly, Illinois courts typically do not interfere with the business decisions of directors and officers unless it can be clearly established that they were not acting in good faith. To overcome the business judgment rule, the plaintiff must at the outset of the case plead facts, which if proven, would clearly establish that the corporate agent did not act with due care and thus should not be afforded the protection of the business judgment rule. Most often, this requires a plaintiff to adequately plead fraud, corruption, a breach of trust, shareholder oppression, conflict of interest, improper motive, bad faith, overreaching, complete abdication of corporate responsibility, or a failure to investigate that was clearly unreasonable under the circumstances known to them at the time.

A plaintiff who cannot adequately plead one of these things will likely have his or her case dismissed under the business judgment rule. Even if a court determines that the business judgment rule does not apply, it does not automatically mean the corporate officer is held personally liable. It simply means that the officer must prove that his or her actions were in the best interest of the company and reasonable under the circumstances and were not compelled by some ulterior motive or gross incompetence.

If you are a shareholder that suspects a corporate officer of breaching his or her fiduciary duties or are an officer, director, or controlling shareholder being accused of breaching your fiduciary duties, it is advisable to seek the counsel of an experienced business litigation and breach of fiduciary duty attorney.

The lawyers at Lubin Austermuehle have more than three decades defending and prosecuting claims involving corporate officers, directors, and LLC members and managers including breach of fiduciary duty and fraud claims and claims involving the freeze-out of members in the federal and state Chancery courts in Illinois. We are knowledgeable regarding the changes and complexities of fiduciary duty law, business divorces and corporate oppression lawsuits. We are committed to fighting for our clients' rights in shareholder dispute cases at both the trial and appellate court levels. We have successfully defended or prosecuted cases achieving large settlements for our clients or winning them control of their business. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated business separation, accounting and breach of fiduciary duty cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online, at our toll-free number at 630-333-0333.