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Business Judgment Rule in Georgia Strengthened By New Law

Business

From Berman Fink Van Horn

On July 1, 2017, a new Georgia law, which amends both the Georgia Business Corporation Code and the Financial Institutions Code of Georgia, came into effect. The new law strengthens the business judgment rule applicable to officers and directors of Georgia corporations, including officers and directors of financial institutions.

The business judgment rule is a case law-created doctrine that gives officers and directors a presumption that, in making a business decision, the officers and directors acted in good faith, in an informed manner and in the best interests of the company and its shareholders. The business judgment rule protects officers and directors from personal liability unless it is proven that an officer or director acted in bad faith, showed disloyalty to the company, engaged in self-dealing or abused the officer’s or director’s discretion.

Though the Georgia Supreme Court had never specifically stated as such in a ruling, prior to 2014, most Georgia officers and directors (and their counsel) assumed that the business judgment rule followed the rule of other states by precluding claims against officers and directors based on ordinary negligence (i.e., the presumption created by the business judgment rule could only be overcome by showing that an officer or director acted in a manner amounting to gross negligence).    However, in 2014, the Georgia Supreme Court refined the business judgment rule with its decision in the case of FDIC v. Loudermilk.

In Loudermilk, one of many lawsuits brought by the FDIC in Georgia against officers and directors of failed Georgia banks in the wake of the 2008 financial crisis, the FDIC argued that under the business judgment rule in Georgia, officers and directors should liable for negligence.  In a controversial ruling, the Supreme Court interpreted the business judgment rule in Georgia to protect officers and directors of Georgia corporations from claims of negligence relating to decisions made by them, but that the officers and directors could be held liable for negligent breaches of their fiduciary duty of care if the officers and directors utilized an inadequate process in making the decision.

Under the new law, there is a presumption that the process officers and directors follow in arriving at decisions was done in good faith and that the officers and directors have exercised ordinary care.  In order to rebut the presumption, one must show that the process constitutes gross negligence by being a gross deviation from the standard of care of a director or officer in a like position under similar circumstances.  The new Georgia law is a direct response to the Loudermilk case and brings Georgia in line with other states.

The new law also makes it clear that Georgia officers and directors, including those of financial institutions may rely on other officers, employees or agents of the corporation whom the officer or director reasonably believes to be reliable and competent, and on information, data, opinions, reports or statements provided by other officers, employees, agents, legal counsel, accountants or other experts reasonably believed by the officer or director to be reliable and within the scope of such person’s expertise.