Case Background & Strategy

Section 214 of the Companies Act 2016 provides that a director who makes a business judgment is deemed to meet the duty of care, skill and diligence if the judgment is made in good faith for a proper purpose, without material personal interest, informed to the extent the director reasonably believes appropriate, and in the reasonable belief that it is in the best interest of the company.

What counts as a ‘business judgment’?

A business judgment is a decision to take or not take action on a matter relevant to the company’s business — for example, entering a contract, pricing a transaction, or pursuing or abandoning a venture. The rule protects decisions, not neglect: a director who never turned their mind to the issue cannot rely on it.

The four conditions

To engage the protection, the director must show
(1) good faith and proper purpose;
(2) no material personal interest in the subject matter;
(3) that they informed themselves to an extent they reasonably believed appropriate — board papers, management reports, professional advice; and
(4) a rational belief that the decision was in the company’s best interest. Documentation is critical: contemporaneous board minutes and advice trails are usually what wins or loses the point.

The rule in director disputes

In breach-of-duty litigation, the business judgment rule prevents the court from substituting hindsight for the board’s commercial assessment. It does not, however, immunise conflicted transactions, improper purposes, or decisions made on no information. Directors facing claims — and companies suing former directors — should analyse each impugned decision against the four limbs early, because it frequently determines settlement value.

Frequently asked questions

Does the business judgment rule cover fiduciary breaches?

No. It addresses the duty of care, skill and diligence. Conflicts of interest and improper-purpose claims must be answered on other grounds.

Who bears the burden of proof?

The director invoking section 214 must establish the elements of the defence on the evidence.

How Messrs Ng, Zainurul, Seke & Khoo can help: our corporate and commercial litigation team advises boards, directors and shareholders across Malaysia on governance disputes, from advisory and board-level strategy through to trial. Contact us for a consultation.