The business judgement rule: the key to decision-making in business

This article answers the following questions:

• What is regulated by the business judgement rule?
• What is "justified business risk"?
• What circumstances should be considered in assessing the activities of corporate bodies?

The business judgement rule (BJR) – referring to the liability of members of the governing bodies of joint-stock companies and limited liability companies – is a key factor which must be taken into account by decision makers while conducting business activity both in Poland and internationally. Why is it so important, and what risk management practices are worth considering for the rule to be effective? In this article, we will look at the most important issues relating to this concept.

What is the business judgement rule?

The business judgement rule (BJR) is a legal mechanism introduced under the so-called holding law, i.e. amending legislation to the Polish Commercial Companies Code.

In accordance with this rule, liquidators and members of the management board, supervisory board, or audit committee are not in breach of the duty of care arising from the professional nature of their actions if they are compliant with the duty of loyalty to the company and their actions fall within the limit of justified business risk, which includes decision-making on the basis of information, analyses, and opinions taken into account while making careful assessment under given circumstances.

The rule is important because, before its introduction, board members were liable to the company in which they served if, due to an action or omission that contradicted the law or the articles of association, the company sustained a loss attributable to that board member. The business judgement rule generally fixes the lack of precision in the previously applicable regulations, which did not explicitly state how to approach failed business decisions made by board members. (Thus, there was a possibility that board members could be held liable for decisions which generated losses even though the decisions were reasonable).

After the introduction of the business judgement rule, the actions of board members are assessed on the basis of an analysis of the decision-making process, not by the outcome of the decisions. If a decision of a board member was justified at the time of its making and supported with adequate analyses, the liability for losses sustained by the company as a consequence of that decision may be excluded. The rule applies if the decision was made within the limit of justified business risk, on the basis of information adequate to the circumstances.

The business judgement rule in Poland and abroad

The business judgement rule was introduced in Poland on 13 October 2022 under legislation amending the Commercial Companies Code. 

The introduction of the proposed changes was a step towards harmonisation of the mechanisms applied in limited liability companies and joint-stock companies with those that had been implemented in simple joint-stock companies (which involved the lack of arguments for the differentiation of the regulations).

Similar legal concepts can be found in the codes or statutes of many other countries, e.g. Austria, Croatia, Czech Republic, Spain, Germany, Portugal, Slovakia, or Romania. Furthermore, it is important to note that the business judgement rule is included in the European Model Companies Act.

Justified business risk

Justified business risk is one of the most important elements of the business judgement rule. Thanks to the introduction of this concept, managerial staff may take decisions which involve certain financial or operating risk, but only if such decisions are reasonably justified.

An example of this can be a decision to invest in new technology which may bring real long-term benefits, but the adoption of which involves high risk. If the decision to invest funds in the new technology was made after a thorough analysis of available information and to the best interest of the company, the risk is justified, and the decision makers should not be liable for any losses sustained by the company as a result of that action.

Risk is an inherent element of business activity, and each business decision involves some level of uncertainty. BJR ensures safer decision-making, releasing managers from liability for any missteps as long as they acted in good faith and made the decision after careful assessment of all circumstances.

How to apply the business judgement rule in practice?

To apply the business judgement rule in practice, it is necessary to fulfil several basic conditions and remember that the assessment of the actions of corporate bodies must take place at the moment the business decision is made. It is necessary to assess whether:

• the decision-making process was appropriate,
• due care was observed,
• the actions were taken in a reliable manner,
• the duty of loyalty was fulfilled, and the company's best interest was safeguarded.

To satisfy the above conditions, the most important thing for board members is to make decisions in good faith, acting not for their own benefit, but with the intention to ensure long-term success of their company.

It is, therefore, crucial to be independent in decision-making and avoid conflicting interest situations or transactions. To maintain full transparency of all actions, decisions must be made on the basis of thorough and reliable assessment of information at hand (e.g. obtained through a financial analysis, from expert advisors, or by means of an internal audit or a different kind of research). Obviously, in the decision-making process, it is necessary to assess the risk objectively and adequately to a given situation, so as to strike the right balance between profits and potential losses.

Board members should also remember that the decision-making process is worth documenting. Recorded consultations with a tax advisor and archives of analyses and documents might help in a situation where it needs to be demonstrated that the decision-making process was clear and based on sound arguments. Such materials might be immensely helpful in the event of any legal disputes.

Management and supervisory board members must remember that their decisions may arouse strong emotions

The business judgement rule is an integral element of corporate law and lays the groundwork for making bold decisions – to the best interest of the company and on the basis of rational premises – without fear of being liable for potential losses. It must be remembered, however, that to apply this rule in practice, sound risk management and documenting the decision-making process are crucial.

To make sure the business judgement rule is dutifully followed, it is recommended to contact the right advisor. Experts providing corporate advisory services and specialists in analysing commercial contracts have professional knowledge to objectively assess the legitimacy of each business decision, identify risks, provide legal grounds, and decide whether board actions are taken within the limit of justified business risk. The advisor's assessment may be prepared in the form which is preferred by your organisation – e.g. a legal opinion, tax opinion, or report.