The Business Judgment Rule

Running a business inevitably involves making decisions under uncertainty. Markets shift, competitors emerge, and economic conditions change in ways that cannot always be predicted. The business judgment rule exists to protect directors who make honest, informed decisions that later prove poor, distinguishing genuine business failures from breaches of fiduciary duty.

This principle has gained renewed attention across Europe in recent years, as high-profile corporate scandals and evolving regulatory frameworks have tested the boundaries between acceptable business risk and director liability. Understanding how European courts apply the business judgment rule—and what practical steps directors can take to stay protected—has never been more important.

WHAT IS THE BUSINESS JUDGMENT RULE?

The business judgment rule is a legal doctrine that shields corporate directors from personal liability for decisions made in good faith, on an informed basis, and in the honest belief that the action served the company's best interests. The rule recognizes that judges are not business experts and should not second-guess reasonable commercial decisions simply because they resulted in losses.

In practice, the rule creates a presumption in favor of directors: courts will not intervene unless a challenger can demonstrate that the directors breached their fiduciary duties through negligence, self-dealing, or failure to properly inform themselves before acting.

Application Across European Jurisdictions

While the business judgment rule originated in Anglo-American common law, many European civil law jurisdictions have adopted similar concepts. Germany codified its version in 2005 within the Stock Corporation Act (Aktiengesetz), providing that directors are not in breach of duty if they reasonably believed they were acting in the company's best interests based on appropriate information.

Poland followed suit in 2022, amending its Code of Commercial Companies to offer comparable protections. The Netherlands, though lacking explicit codification, has developed through case law a framework of "marginal judicial review" that similarly restrains courts from overturning board decisions except in clear cases of improper conduct.

The UK Companies Act 2006 codifies directors' duties, including the duty to exercise reasonable care, skill, and diligence. While not explicitly labelled as a business judgment rule, English courts have long recognized that directors are entitled to take commercial risks without facing liability for honest errors of judgment.

LESSONS FROM RECENT EUROPEAN CASES

Wirecard: When the Rule Cannot Save You

The Wirecard scandal represents Germany's largest post-war corporate fraud. When the payment processor collapsed in June 2020 after admitting that €1.9 billion was "missing" from its accounts, it exposed catastrophic failures in corporate governance and oversight.

In September 2024, the Munich Regional Court ordered former Wirecard board members to pay €140 million in damages for breach of fiduciary duties. The court found that CEO Markus Braun and the former CFO had approved an unsecured €100 million loan without proper due diligence or supervisory board approval. The business judgment rule provided no defense because the directors had not acted on the basis of adequate information—a fundamental requirement for the rule's protection.

Key lesson: The business judgment rule requires procedural diligence. Directors cannot claim its protection when they fail to gather appropriate information, ignore red flags, or bypass required approval processes. Documentation of decision-making is essential.

Siemens v. Neubürger: The Compliance Mandate

The 2013 Siemens v. Neubürger decision remains the landmark German case on board-level compliance duties. Following the discovery of widespread bribery within Siemens, the Munich Regional Court established that boards have an affirmative duty to implement and monitor effective compliance management systems.

A decade later, in December 2023, the Higher Regional Court of Nuremberg extended this principle to directors of limited liability companies (GmbHs), holding that directors breach their duties if misconduct is enabled by inadequate organization or control. Compliance responsibilities cannot be fully delegated—ultimate accountability remains with the board.

Key lesson: The business judgment rule does not protect directors who fail to establish proper oversight structures. Compliance is not optional—it is a core directorial duty.

Steinhoff: Cross-Border Complexity

The Steinhoff accounting scandal, which emerged in December 2017, wiped out over 95% of the company's share value and triggered litigation across South Africa, the Netherlands, and Germany. A PwC investigation revealed that profits had been overstated by approximately $7.4 billion through fictitious transactions orchestrated by senior executives.

The settlement process was finalized in early 2022, with the Amsterdam District Court sanctioning a composition plan that included contributions from directors' and officers' liability insurers. Criminal proceedings against former executives continue in South Africa, with charges including racketeering and fraud totaling R21 billion.

Key lesson: Cross-border operations create complex liability exposure. Directors must understand their duties under multiple legal systems and ensure governance structures can withstand scrutiny in all relevant jurisdictions.

BTI v. Sequana: UK Supreme Court on Creditor Duties

In October 2022, the UK Supreme Court delivered its judgment in BTI 2014 LLC v. Sequana SA, clarifying when directors must consider creditor interests. The court held that the "trigger point" for this duty is when insolvency is imminent or insolvent liquidation is probable.

Lady Arden's judgment emphasized the importance of directors staying informed, maintaining up-to-date financial information, and ensuring they receive alerts when cash reserves deplete to the point where creditors risk not being paid.

Key lesson: The business judgment rule operates within the context of fiduciary duties. When a company approaches insolvency, the duty to consider creditor interests may override shareholder-focused decisions.

THE ESG FACTOR: EXPANDING DIRECTOR OBLIGATIONS

The European regulatory landscape is transforming director responsibilities through new sustainability requirements. The Corporate Sustainability Due Diligence Directive (CSDDD), which entered into force in July 2024, requires large companies to identify and address adverse human rights and environmental impacts across their value chains.

As Professor Holger Fleischer noted in his analysis for Oxford Law Blogs, the expanding body of ESG norms creates a "two-pronged attack" on the business judgment rule. Directors who fail to comply with legal requirements—including sustainability obligations—cannot invoke the rule's protection. Moreover, the duty to install and monitor compliance systems now extends to ESG matters.

The Corporate Sustainability Reporting Directive (CSRD) adds another layer, requiring detailed sustainability reporting that could expose gaps between stated commitments and actual practices. Directors who sign off on misleading ESG claims face potential liability for greenwashing.

PRACTICAL REMINDERS FOR DIRECTORS

The cases examined above reveal consistent themes about what protects directors—and what exposes them to liability. The following practical guidelines can help ensure that business decisions remain within the safe harbor of the business judgment rule:

1. Get Everything in Writing

• Document all material decisions with contemporaneous written records
• Record the information considered, alternatives evaluated, and rationale for the chosen course
• Maintain detailed board minutes that reflect genuine deliberation, not rubber-stamping
• Preserve external advice, expert reports, and supporting analyses

2. Gather Adequate Information Before Deciding

• Identify what information is reasonably available and take steps to obtain it
• Seek independent expert advice for complex or high-stakes decisions
• Allow sufficient time for proper analysis—avoid artificial urgency
• Question assumptions and challenge overly optimistic projections

3. Manage Conflicts of Interest Rigorously

• Disclose any personal interest in a transaction, however indirect
• Recuse yourself from decisions where you have a material conflict
• Obtain independent board approval for related-party transactions
• Remember that the business judgment rule does not apply where self-dealing exists

4. Establish and Monitor Compliance Systems

• Implement a compliance management system appropriate to the company's size and risk profile
• Ensure regular reporting to the board on compliance matters
• Act promptly on red flags and compliance incidents
• Remember that delegation does not mean abdication—ultimate responsibility stays with the board

5. Stay Informed About Company Finances

• Maintain up-to-date knowledge of the company's financial position
• Ensure mechanisms exist to alert you to cash flow concerns
• Recognize when insolvency becomes a realistic prospect—creditor duties then arise
• Seek professional advice promptly when financial distress appears

6. Seek Professional Advice Early

• Engage legal counsel for material transactions and strategic decisions
• Obtain financial and tax advice before significant corporate actions
• Document that you relied on expert advice in good faith
• Remember that professional advice helps demonstrate informed decision-making

7. Understand Cross-Border Implications

• Know which jurisdictions' laws apply to your directorial duties
• Recognize that different countries may have different standards
• Ensure D&O insurance covers activities in all relevant jurisdictions
• Be aware of the evolving EU regulatory framework, including CSDDD and CSRD

CONCLUSION

The business judgment rule remains a vital protection for corporate directors across Europe, enabling them to take calculated risks in pursuit of business objectives without constant fear of litigation. However, recent cases demonstrate that the rule is not a blank cheque. Directors must act in good faith, inform themselves adequately, avoid conflicts of interest, and establish proper oversight mechanisms.

The lesson from Wirecard, Siemens, Steinhoff, and other scandals is clear: process matters. Courts will not second-guess substantive business decisions, but they will scrutinize whether directors followed proper procedures before making those decisions.

As ESG requirements expand the scope of directorial obligations, the importance of documentation, informed decision-making, and robust compliance systems will only increase. Directors who embrace these practices position themselves to benefit from the business judgment rule's protection—while those who neglect them may face personal liability when business decisions go wrong.

In short: make informed decisions, document everything, and when in doubt, seek expert advice.

Disclaimer: This article is provided for general informational purposes only and does not constitute legal advice. The directors should consult qualified legal counsel regarding their specific circumstances and obligations under applicable law.