What principle protects directors from liability for their decisions?

The business judgment rule is a fundamental principle in corporate law that protects directors and officers from liability for decisions made in good faith as part of their governance of the company. This rule acknowledges that the business landscape is inherently complex and that directors must make decisions based on the information available to them at the time, even if those decisions ultimately result in negative outcomes for the company.

Under the business judgment rule, as long as directors act with the appropriate care, in good faith, and in the best interests of the company, their decisions are afforded a presumption of validity. This means that courts generally will not interfere with the decisions made by directors, provided there is no evidence of fraud, self-dealing, or gross negligence. Consequently, this rule encourages directors to take risks and make entrepreneurial decisions without the constant fear of personal liability, promoting effective management of the corporation.

The other options do not accurately capture the principle that provides this kind of protection for directors.