Director Duties and the Business Judgment Rule in California
Corporations
Director Duties and the Business Judgment Rule in California
October 19, 2026 · R|R Insights · CA Business Law Brief
Core Concept
California directors owe two core fiduciary duties to the corporation: the duty of care and the duty of loyalty. The duty of care requires a director to act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances (Corp. Code § 309(a)). The duty of loyalty requires a director to act in a manner the director reasonably believes to be in the best interests of the corporation—not in the director’s own personal interest or the interest of a third party at the expense of the corporation.
The business judgment rule is the common law (and statutory, under § 309) shield that protects directors from personal liability when a business decision goes wrong. The rule creates a rebuttable presumption that directors acted on an informed basis, in good faith, and in the honest belief that the action was in the corporation’s best interests. A plaintiff challenging a board decision must overcome this presumption; if the rule applies, courts will not second-guess the substance of the decision even if it turns out to be a failure.
In California, the business judgment rule has both common law and statutory dimensions. Corporations Code § 309 codifies the standard of conduct; it does not expressly state an immunity standard but is interpreted in tandem with the common law rule. A director who satisfies § 309—acting in good faith, in a manner believed to be in the best interests of the corporation—is not liable for business decisions even if they cause harm to the corporation.
Key Rules
| Duty of care standard | Business judgment rule presumption |
| A director must act with the care an ordinarily prudent person in like position would use; may rely in good faith on reports of officers, attorneys, accountants, and board committees (§ 309(b)). | Courts presume directors acted on an informed basis, in good faith, and in the corporation’s best interest; plaintiff bears the burden of overcoming this presumption to impose liability. |
| Duty of loyalty — conflicted transactions | Safe harbor for interested director transactions |
| A director may not use their position to gain a personal benefit at the corporation’s expense; self-dealing transactions require disclosure and approval by disinterested directors or shareholders (§ 310). | An interested director transaction is not void or voidable if: (1) material facts are disclosed and disinterested directors approve; (2) shareholders approve; or (3) the transaction is fair to the corporation at the time approved (§ 310(a)). |
| Reliance on experts | When the rule does not apply |
| Directors may rely on written reports by officers, counsel, accountants, or board committees if they reasonably believe those persons are reliable and competent—reliance defeats a failure-to-inform claim (§ 309(b)). | The business judgment rule does not protect: decisions made in bad faith, decisions tainted by a conflict of interest, decisions made without reasonable investigation, or decisions that constitute waste. |
Applies / Does Not Apply
| ✓ Applies When | ✗ Does Not Apply When |
| Board approves an acquisition that later fails—directors reviewed financial projections, retained advisors, and voted in good faith after deliberation; business judgment rule defeats the shareholder suit | CEO sells corporate assets to a company in which she holds a 40% interest without disclosing the conflict or obtaining disinterested board approval—duty of loyalty breach, no business judgment protection |
| Board approves executive compensation that shareholders later challenge as excessive—courts give broad deference to compensation decisions made through a proper process | Director rubber-stamps a transaction without reviewing materials or attending meetings—failure to inform oneself is a breach of the duty of care that defeats the rule’s protection |
| Board declines to pursue a litigation opportunity after receiving counsel’s advice—reasonable reliance on legal opinion satisfies the informed-decision requirement | Board approves a transaction that amounts to a gift of corporate assets for no consideration—waste is not protected by the business judgment rule regardless of good faith |
In Practice
| Transactional | Litigation |
| Build a record of informed deliberation before every significant board decision: board packages with financial data, independent fairness opinions for M&A transactions, minutes reflecting the substance of deliberations (not just votes), and written reports from counsel and outside advisors. For interested director transactions, run the § 310 safe harbor: disclose all material facts to the disinterested directors and document their approval. | Shareholder derivative suits challenging board decisions must overcome the business judgment presumption. California courts focus on process: Was the decision informed? Was there a conflict? Did directors rely on appropriate advisors? Attack the rule by showing a director had an undisclosed personal stake, failed to review materials before voting, or acted on bad faith instructions from a controlling shareholder. The suit also requires pre-suit demand on the board or a showing of demand futility. |
This brief is for informational purposes only and does not constitute legal advice. For counsel on specific matters, consult qualified legal counsel. © 2026 Reden | Riddell LLP.