What is the business judgment rule and how does it protect Ontario directors?

The business judgment rule is a judicial principle that courts will not second-guess a board's decision simply because it turned out badly, provided the directors acted on a reasonably informed basis, in good faith, and free from material conflicts of interest. Canadian courts have adopted this rule, recognizing that directors must make forward-looking decisions under uncertainty and that courts are poorly placed to micromanage business strategy.

To benefit from the rule, a director generally needs to show they: gathered relevant information before deciding, genuinely considered the corporation's best interests, had no undisclosed personal stake in the outcome, and acted rationally given the circumstances known at the time. The rule is a shield, not a blank cheque — it does not protect decisions made in bad faith, without adequate deliberation, or in furtherance of a personal agenda.

Practically, directors protect themselves by ensuring board meetings are documented, outside advice is obtained when appropriate (legal, financial, or technical), and dissenting views are recorded in minutes. A paper trail demonstrating a thoughtful process is the best evidence that the business judgment rule should apply. Directors in doubt about a significant decision should consult a corporate lawyer before proceeding.