The business judgement rule is a doctrine of company law under which courts will not second-guess, or hold directors personally liable for, business decisions that turn out badly, provided that the decisions were made in good faith, on an informed basis and in the honest belief that they served the company's interests.
Rationale
Business requires risk-taking. If directors could be made personally liable whenever a reasonable decision produced a loss, capable people would refuse to serve, or would manage defensively. Courts also recognise that judges are poorly placed to evaluate commercial decisions with the benefit of hindsight.
Conditions
Although formulations differ, the protection typically requires that the director had no personal interest in the decision, acted with the care of a prudent person in similar circumstances, informed themselves adequately, and acted in good faith for a proper purpose.
In Indonesian Law
Article 97(5) of Law No. 40 of 2007 on Limited Liability Companies provides that a director cannot be held liable for a company's loss if the director proves that the loss was not caused by the director's fault or negligence; that management was carried out in good faith and with prudence for the company's interests and in accordance with its purposes; that the director had no direct or indirect conflict of interest in the act that caused the loss; and that the director took action to prevent the loss from arising or continuing. Article 104(4) applies similar defences in bankruptcy.
Limits
The rule does not protect fraud, self-dealing, illegality or decisions taken in ignorance of readily available information.