The Business Judgment Rule

Canadian Courts, like their American counterparts, have developed a rule of deference to business decisions called the “business judgment rule”, whereby courts will defer to the directors' business judgment as long as an appropriate degree of prudence and diligence was demonstrated by the directors in the making of the business decision.

The business judgment rule rests on the related notions that (i) directors and officers of corporations often have business expertise that the courts lack, and (ii) they should be free of courts' interference in their deliberations to the extent possible. In the 2004 case of Peoples Department Store Inc. (Trustee of) v. Wise, the Supreme Court of Canada recognized that many decisions made in the course of business, though perhaps ultimately unsuccessful, are reasonable and defensible at the time and under the circumstances in which they were made. Moreover, business decisions are sometimes made under significant pressure and in the absence of detailed information.

It is easy to see unsuccessful business decisions as unreasonable or imprudent with the benefit of hindsight. The business judgment rule is intended to guard against this bias.

While the court will not defer to a decision that it deems wholly unreasonable, it will respect a business decision made (i) independently and without a conflict of interest, (ii) in good faith, (iii) on a reasonably informed basis, (iv) based on information available at the time, and (v) where the decision falls within a reasonable range of options available at the time.

As Weiler J.A. put it in the case of Maple Leaf Foods Inc. v. Schneider Corp., the court will look to see whether the directors made a reasonable decision, not a perfect one.