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Business Judgment Rule (BJR)

By IncNow | Published October 8, 2013

A legal doctrine in Delaware that immunizes management from subsequent attack from owners for actions taken on behalf of a business. It is applicable when the actions of management were in good faith and satisfy the duty of care and were not self-dealing transactions. For self-dealing transactions, the manager is subject to an entire fairness standard and not protected by the Business Judgment Rule. This rule is particularly strong in Delaware and allows management much comfort to take business risks and make decisions which could result in losses to the company. Encouraging this type of risk taking, allows businesses to engage in high risk, high reward behavior. It also encourages management to not be overly risk averse. The net result is more value in the long run to owners, which is one reason why companies incorporated in Delaware on average have higher valuation multiples than peers incorporated in other states. This rule allows business managers to sleep at night without the constant threat of attack by activist shareholders or members.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go