Legal term
Duty of care
Answer: Duty of care. In corporate law, directors and officers owe this fiduciary duty to the corporation: they must act in good faith, become reasonably informed, and reasonably believe decisions serve the corporation’s interests. ([law.cornell.edu](https://www.law.cornell.edu/wex/duty_of_care?trk=article-ssr-frontend-pulse_little-text-block)) Courts analyze alleged breaches under the business judgment rule and focus on decision‑making processes; valid decisions by disinterested, informed fiduciaries in good faith receive deference. ([law.cornell.edu](https://www.law.cornell.edu/wex/duty_of_care?trk=article-ssr-frontend-pulse_little-text-block)) The presumption can be overcome by showing gross negligence or bad faith. ([law.cornell.edu](https://www.law.cornell.edu/wex/business_judgment_rule)) Many charters exculpate monetary damages for breaches of this duty, but not for loyalty breaches, bad faith, intentional misconduct/violations of law, or improper personal benefit; state statutes vary. ([law.cornell.edu](https://www.law.cornell.edu/wex/duty_of_care?trk=article-ssr-frontend-pulse_little-text-block))
Rule to remember
Duty of care (business associations): the fiduciary duty requiring corporate directors and officers to act in good faith, after reasonable inquiry, and with prudence reasonably believed to serve the corporation’s best interests; decisions by disinterested, informed fiduciaries receive deference under the business judgment rule unless gross negligence or bad faith is shown.
Key elements and checks
- Good‑faith decision‑making aimed at the corporation’s best interests.
- Reasonably informed process, including appropriate inquiry and diligence before acting.
- Disinterestedness in the decision (no personal financial conflict).
- Business judgment rule presumption of deference to adequately informed, good‑faith decisions.
- Rebuttal by showing gross negligence or bad faith in the decision process.
- Charter‑based exculpation of monetary damages for this duty is common, but typically excludes loyalty breaches, bad faith, intentional misconduct/violations of law, or improper personal benefit.
In the source’s words
“Courts analyze the duty of care by applying the business judgment rule and examining the processes by which the directors and officers made decisions.”
duty of care | Wex | US Law | LII / Legal Information Institute
“Practically, the business judgment rule is a presumption in favor of the board.”
business judgment rule | Wex | US Law | LII / Legal Information Institute
State variation: Delaware cases often describe liability for board decisions in terms of gross negligence, while many MBCA jurisdictions articulate an ordinary‑prudent‑person conduct standard; both typically apply business‑judgment deference. Exculpation statutes and charter provisions vary by state and cannot waive liability for loyalty or bad‑faith breaches.