What is the primary function of a business judgment rule?

The business judgment rule primarily serves to provide protection to directors of corporations against liability for decisions made in good faith, even if those decisions turn out to be mistaken or lead to negative outcomes. This rule recognizes that directors are often required to make complex and strategic business decisions and that it's crucial for them to be able to act without the constant fear of being held liable for every misjudgment they may encounter.

By establishing this principle, the business judgment rule encourages directors to take reasonable risks in pursuit of what they believe to be in the best interests of the corporation, thereby promoting entrepreneurial spirit and decision-making flexibility. It ensures that as long as directors act with due care, in good faith, and within their authority, they won’t face personal financial consequences simply for pursuing a course that doesn't yield favorable results.

While it does relate to shareholder interests, protection from liability for honest mistakes is its core purpose, allowing managers to effectively lead and make decisions without excessive legal scrutiny for their choices. This way, directors can focus on the company’s operations and strategic direction rather than worrying about potential lawsuits stemming from their business decisions.