business judgment rule in California

2026(Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 257 .) The business judgment rule is “based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the direc

2025Although the business judgment rule does not apply to all condominium associations (Lamden, supra, 21 Cal.4th at p. 259 ), it applies here because the HOA is incorporated.

2025Guiding Principles “The business judgment rule is a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. [Citation.] ‘The rule is based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisions are based

2023(Coley v. Eskaton, supra, 51 Cal.App.5th at p. 953; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 430 ; Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 .) “Deference under the business judgment rule is premised on the notion that corporate directors are best able to judge whether a particular transaction will further the company’s best interests. [Citation.] But that premise is undermined when directors approve corporate transactions in which they have a material personal interest unrelated to the business’s own interest.” (Coley, at p. 953.) 3.

2026(See Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1267 ; Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 32 .) Here, substantial evidence supports the trial court’s application of the business judgment rule.

2025He contends the trial court erred when it failed to apply the business judgment rule, which insulates directors and officers from liability “for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 ; see Brooks v. Horner (Alaska 2015) 344 P.3d 294, 2973 .) 3 Syed cites the law of Alaska, not California, as controlling because HS&S was incorporated in that state until February of 10 Syed raised this affirmative defense

2026(Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 257 .) The business judgment rule is “based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the direc

2025Returning to the Oppermans’ sole contention of “conflicting inferences,” the observation by Justice Croskey in the leading case of Lee, supra, 50 Cal.App.4th at p. 717 is apt: “it is the very essence of the business judgment rule that, where a reasonable business purpose is asserted, the motives of 26 directors will not be scrutinized, absent a basis for overcoming the presumption of good faith embodied by the business judgment rule.” (Accord, 1 Knepper & Bailey, Liability of Corporate Officers & Directors, supra, § 2:10.) The Oppermans have demonstrated no such basis here.

2023A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.”’ [Citations.] [¶] Put differently, whether a director exercised reasonable diligence is one of the ‘factual prerequisites’ to application of the business judgment rule.” (Palm Springs Villas II Homeowners Assn., Inc. v. Parth (2016) 248 Cal.App.4th 268, 279-280 ; see Affan v. Portofino Cove Homeowners Assn. (2010) 189 Cal.App.4th 930, 941, 943 [finding homeowners association “failed to establish the factual prerequisites for

2016Next, Parth suggests that the Association's concerns with respect to her lack of diligence in securing a roofing contractor sound in negligence, contending that "a Civil Code section 5800 or its argument that Parth is estopped from claiming ignorance of the governing documents. 27 director's conduct or decisions are not judged according to a negligence standard." (Boldface omitted.) However, as the authorities discussed ante make clear, there is "no conflict" between the business judgment rule and negligence, and application of that rule "presuppose[s] that . . . reasonable diligence [] has in

2026(Lamden v. La Jolla Shores Clubdominium Homeowners Assn. (1999) 21 Cal.4th 249, 257 .) The business judgment rule is “based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the direc

2023(Shields v. Singleton, supra, 15 Cal.App.4th at p. 1619 .) The prelitigation demand requirement “‘is merely an extension of the business judgment rule, which dictates that judicial interference with corporate decision-making should be limited.’” (Shields v. Singleton, supra, 15 Cal.App.4th at p. 1619 .) “‘The common law business judgment has two components—one which immunizes [corporate] directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith in wh

2023(Ibid.) Judicial deference is accorded to directors under the ‘business judgment rule,’ which recognizes that where decisions are without fraud or breach of trust, ‘management of the corporation is best left to those to whom it has been entrusted, not to the courts. [Citation.]’ (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 183 .) As codified in section 309, the business judgment rule obligates a director to perform his or her duties ‘in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reaso

2021Business Judgment Instruction Except for the bracketed language noted below, the trial court instructed the jury on the business judgment rule as follows: “The business judgment rule is a presumption that in making a business decision [in their capacity as directors] the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.” Over Johnson’s objection, the court refused his request to include the bracketed language, finding it was “redundant 34 because [the instruction is] clearly talking abo

2025Ct. 1985) 493 A.2d 946, 954 .)’ ” (Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352, 1366 .) “ ‘ “[T]he presumption created by the business judgment rule can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” ’ ” (Lauckhart v. El Macero Homeowners Assn. (2023) 92 Cal.App.5th 889 , 906; Eldridge v. Tymshare, Inc. (1986) 186 Cal.App.3d 767, 776 .) Turning to Lamden, it described the setting there, and its holding, in its opening paragraphs: “A building in a condominium de

1989The business judgment rule, which forms the framework for this appeal, is “premised on the notion that those to whom the management of the corporation has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is one which is ‘ “. . . helpful to the conduct of corporate affairs or expedient for the attainment of corporate purposes . . . ’ and establishes a presumption that directors’ decisions are based on sound business judgment.” 3 (Gaillard v. Natomas Co., supra, 208 Cal.App.3d at p. 1263 ; see also Eldridge v. Tymshare, Inc. (1986) 186 Cal.App.3d

2025Ct. 1985) 493 A.2d 946, 954 .)’ ” (Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352, 1366 .) “ ‘ “[T]he presumption created by the business judgment rule can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.” ’ ” (Lauckhart v. El Macero Homeowners Assn. (2023) 92 Cal.App.5th 889 , 906; Eldridge v. Tymshare, Inc. (1986) 186 Cal.App.3d 767, 776 .) Turning to Lamden, it described the setting there, and its holding, in its opening paragraphs: “A building in a condominium de

2020Katz concerned a corporate board’s defensive actions in response to an attempted corporate takeover—actions that were reviewed under Delaware law. ( Katz, supra, 22 Cal.App.4th at pp. 1367-1368.) Applying Delaware law, the Katz court found that because the board directors might have acted to protect their own interests in adopting these defensive measures, the board was not entitled to deference under the business judgment rule unless it first passed the “enhanced” scrutiny test—that is, unless the board showed (1) it had reasonable grounds for believing that “ ‘a danger to corporate policy an

2026(Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1161 .) The business judgment rule may be asserted by a party in a responsive pleading as an affirmative defense.

2025(See Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1161 , citing Corp. Code, §§ 309, 7231.) And while the Association is a non-profit entity, the Legislature has made the business judgment rule applicable to nonprofit corporations.

2024(Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 513 [directors of nonprofit corporations are fiduciaries who are required to exercise their powers in accordance with the duties imposed by the Corporations Code].) A homeowner’s association and its board members may also be protected from liability under two theories: (1) a rule of judicial deference to their decision-making and (2) the business judgment rule.

2023(Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 513 .) Under the business judgment rule, however, judicial deference must be given to board decisionmaking when the owners in common interest developments seek to litigate business decisions that are entrusted to the discretion of their associations’ board of directors.

2016(See Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374 (Nahrstedt) [finding "courts will uphold decisions made by the governing board of an owners association," where among other things, they "are consistent with the development's governing documents"]; Lamden, supra, 21 Cal.4th at p. 253 [requiring that association board "exercise[] discretion within the scope of its authority under relevant statutes, covenants and restrictions" in order to merit judicial deference]; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 979 [accord]; Scheenstra v. California D

2009(Cf. Leighton, supra, 219 Cal.App.3d at p. 1071 [explaining that it is the employer, not the server, who is to determine whether fellow employees are properly doing their jobs].) Just as the business judgment rule insulates from court review management decisions made by corporate directors in good faith in what they believe is the organization's best interests (see, e.g., Ekstrom v. Marquesa at Monarch Beach Homeowners Assn. (2008) 168 Cal.App.4th 1111, 1121 [ 86 Cal.Rptr.3d 145 ]), so should an employer's good faith tip pool distribution policy be accorded a substantial level of deference.

2023(See Scheenstra v. California Dairies, Inc. (2013) 213 Cal.App.4th 370, 388 [company’s decision is not scrutinized under the business judgment rule until after the court determines that the company’s action falls within the discretionary range of action authorized by the contract].) 17 a duty independent of the contract arising from principles of tort law. [Citation.]” (Erlich v. Menezes (1999) 21 Cal.4th 543, 551 .) Here, the conversion claim is based entirely on Patriot’s alleged breach of the operating agreement.

2016(See Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374 (Nahrstedt) [finding "courts will uphold decisions made by the governing board of an owners association," where among other things, they "are consistent with the development's governing documents"]; Lamden, supra, 21 Cal.4th at p. 253 [requiring that association board "exercise[] discretion within the scope of its authority under relevant statutes, covenants and restrictions" in order to merit judicial deference]; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 979 [accord]; Scheenstra v. California D

2016The trial court erred in granting summary judgment The Association raises two challenges to the summary judgment ruling: that the trial court erred by applying the business judgment rule to Parth's ultra vires acts (or 6 (See Everest, supra, 114 Cal.App.4th at p. 430 [finding that triable issues of fact as to the existence of improper motives and a conflict of interest "preclude[d] summary judgment based on the business judgment rule"]; Will v. Engebretson & Co. (1989) 213 Cal.App.3d 1033, 1044 ["Will submitted evidence that . . . the committee members never reviewed the complaint, the financi

2016(See, e.g., Denham v. Superior Court (1970) 2 Cal.3d 557, 564 [ 86 Cal.Rptr. 65 , 468 P.2d 193 ] [“[E]rror must be affirmatively shown.”]; Reyes v. Kosha (1998) 65 Cal.App.4th 451, 466, fn. 6 [ 76 Cal.Rptr.2d 457 ] [“Although our review of a summary judgment is de novo, it is limited to issues which have been adequately raised and supported in [appellants’] brief.”].) 5 All further statutory references are to the Corporations Code unless otherwise indicated. 6 (See Everest, supra. 114 Cal.App.4th at p. 430 [finding that triable issues of fact as to the existence of improper motives and a confl

2009(Anderson v. Derrick (1934) 220 Cal. 770, 773-774 [ 32 P.2d 1078 ]; see also Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127 [ 84 Cal.Rptr.2d 753 ].) A contrary rule “would ‘authorize multitudinous litigation and ignore the corporate entity.’ [Citation.]” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 [ 25 Cal.Rptr.3d 468 ] (Schuster).) And “[directors have the same discretion with respect to the prosecution of claims on behalf of the corporation as they have in other business matters.” (Findley v. Garrett (1952) 109 Cal.App.2d 166, 177 [ 240 P.2d 421 ] (Findley).) Thus, the business j

2009(Anderson v. Derrick (1934) 220 Cal. 770, 773-774 [ 32 P.2d 1078 ]; see also Nelson v. Anderson (1999) 72 Cal.App.4th 111, 127 [ 84 Cal.Rptr.2d 753 ].) A contrary rule “would ‘authorize multitudinous litigation and ignore the corporate entity.’ [Citation.]” (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 312 [ 25 Cal.Rptr.3d 468 ] (Schuster).) And “[directors have the same discretion with respect to the prosecution of claims on behalf of the corporation as they have in other business matters.” (Findley v. Garrett (1952) 109 Cal.App.2d 166, 177 [ 240 P.2d 421 ] (Findley).) Thus, the business j

2023A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.”’ [Citations.] [¶] Put differently, whether a director exercised reasonable diligence is one of the ‘factual prerequisites’ to application of the business judgment rule.” (Palm Springs Villas II Homeowners Assn., Inc. v. Parth (2016) 248 Cal.App.4th 268, 279-280 ; see Affan v. Portofino Cove Homeowners Assn. (2010) 189 Cal.App.4th 930, 941, 943 [finding homeowners association “failed to establish the factual prerequisites for

2016A director cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment.' " (Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 852-853 (Burt); Gaillard, supra, at pp. 1263-1264 [accord].) Put differently, whether a director exercised reasonable diligence is one of the "factual prerequisites" to application of the business judgment rule.

2015(See Aronson, supra, 473 A.2d at pp. 814– 816 [allegation that director owning 47 percent of corporation’s stock “personally selected” each corporate director did not support claim that directors lacked independence].) These allegations do not permit a determination of independence or disinterest “on a director-by-director basis.” (Bader, at p. 790.) Under the second prong, the allegations must establish that the “‘challenged transaction was [not] otherwise the product of a valid exercise of business judgment.’” (Bader, supra, 179 Cal.App.4th at p. 791 ; Aronson, supra, 473 A.2d at p. 814 .) T

2015(See Katz v. Chevron Corp. (1994) 22 Cal.App.4th 1352, 1366 , quoting Aronson, supra, 473 A.2d at p. 812 [“under the business judgment rule[,] director liability is predicated upon concepts of gross negligence”].) To the extent the board’s resolution attached to the second amended complaint suggests the directors knew RAC “could not pay . . . its current corporate 18 lease,” it is unclear whether RAC already had defaulted on the lease.

2002Co. (1993) 16 Cal.App.4th 365, 378 [ 20 Cal.Rptr.2d 87 ].) “The business judgment rule sets up a presumption that directors’ decisions are made in good faith . . . .” (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715 [ 57 Cal.Rptr.2d 798 ], italics omitted.) Equality argues that assuming Biren‘s good faith, the business judgment rule does not protect her because she did not obtain board approval *137 prior to engaging PHSS.

2002Co. (1993) 16 Cal.App.4th 365, 378 [ 20 Cal.Rptr.2d 87 ].) “The business judgment rule sets up a presumption that directors’ decisions are made in good faith . . . .” (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715 [ 57 Cal.Rptr.2d 798 ], italics omitted.) Equality argues that assuming Biren‘s good faith, the business judgment rule does not protect her because she did not obtain board approval *137 prior to engaging PHSS.

2025(Corp. Code, § 7231.) Thus, it would appear that the business judgment rule applies here, not just by analogy. 5 Returning to Lamden, the Court continued with discussion of numerous cases involving homeowner’s associations, especially Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361 (Nahrstedt).

2016(See Nahrstedt v. Lakeside Village Condominium Assn. (1994) 8 Cal.4th 361, 374 (Nahrstedt) [finding "courts will uphold decisions made by the governing board of an owners association," where among other things, they "are consistent with the development's governing documents"]; Lamden, supra, 21 Cal.4th at p. 253 [requiring that association board "exercise[] discretion within the scope of its authority under relevant statutes, covenants and restrictions" in order to merit judicial deference]; Dolan-King v. Rancho Santa Fe Assn. (2000) 81 Cal.App.4th 965, 979 [accord]; Scheenstra v. California D

2015The Courts of Appeal have held: “The business judgment rule is a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. [Citation.] ‘The rule is based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisi

2015The Courts of Appeal have held: “The business judgment rule is a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions. [Citation.] ‘The rule is based on the premise that those to whom the management of a business organization has been entrusted, and not the courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the organization’s affairs or expedient for the attainment of its purposes. [Citations.] The rule establishes a presumption that directors’ decisi

2025He contends the trial court erred when it failed to apply the business judgment rule, which insulates directors and officers from liability “for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 ; see Brooks v. Horner (Alaska 2015) 344 P.3d 294, 2973 .) 3 Syed cites the law of Alaska, not California, as controlling because HS&S was incorporated in that state until February of 10 Syed raised this affirmative defense

2025He contends the trial court erred when it failed to apply the business judgment rule, which insulates directors and officers from liability “for a mistake in business judgment which is made in good faith and in what he or she believes to be the best interests of the corporation, where no conflict of interest exists.” (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1263 ; see Brooks v. Horner (Alaska 2015) 344 P.3d 294, 2973 .) 3 Syed cites the law of Alaska, not California, as controlling because HS&S was incorporated in that state until February of 10 Syed raised this affirmative defense

2022The Value of the Release of Class Claims Through its preliminary and final approval orders, the court focused on “challenges to achieving a financial recovery” and “the impossibility of rewriting the history of the negotiations leading up to Corning’s offer.” The challenges contemplated by the court included (1) the likely application of the business judgment rule,10 rather than enhanced scrutiny, to examine the directors’ actions in connection with the merger; and (2) the likelihood that, even under enhanced scrutiny, case-specific facts supported the reasonableness of the transaction, making

2022The Value of the Release of Class Claims Through its preliminary and final approval orders, the court focused on “challenges to achieving a financial recovery” and “the impossibility of rewriting the history of the negotiations leading up to Corning’s offer.” The challenges contemplated by the court included (1) the likely application of the business judgment rule,10 rather than enhanced scrutiny, to examine the directors’ actions in connection with the merger; and (2) the likelihood that, even under enhanced scrutiny, case-specific facts supported the reasonableness of the transaction, making

2023(Ibid.) Judicial deference is accorded to directors under the ‘business judgment rule,’ which recognizes that where decisions are without fraud or breach of trust, ‘management of the corporation is best left to those to whom it has been entrusted, not to the courts. [Citation.]’ (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 183 .) As codified in section 309, the business judgment rule obligates a director to perform his or her duties ‘in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reaso

2021The parties do argue otherwise. 2 Cal.App.4th 572, 586, fn. 5 [applying Aronson in action against a California corporation].) The Aronson test “is well suited to actions challenging conscious decisions by boards to act or refrain from acting, the business judgment rule.” (Bader, supra, 179 Cal.App.4th at p. 791 .) Under the Aronson test, “a court, in deciding whether a plaintiff will be excused from making a demand on the board, must evaluate ‘whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the cha

2026(See Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1267 ; Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 32 .) Here, substantial evidence supports the trial court’s application of the business judgment rule.

1996Ahmanson & Co. (1969) 1 Cal.3d 93, 114-115 [ 81 Cal.Rptr. 592 , 460 P.2d 464 ]; Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 505, 507 [ 229 Cal.Rptr. 456 , 723 P.2d 573 , 59 A.L.R.4th 447 ]; Tenzer v. Superscope, Inc. (1985) 39 Cal.3d 18, 31 [ 216 Cal.Rptr. 130 , 702 P.2d 212 ]; Barnes, supra, 16 Cal.App.4th at p. 375 ), yet their management decisions are shielded by the business judgment rule.