New Law Strengthens Georgia’s Business Judgment Rule

Liaibility of Georgia Shareholders for Business decisions

by Robby Stubley

Recent changes to Georgia’s laws have made changes that impact businesses and their decision makers.  Specifically, House Bill 192, codified at O.C.G.A. § 7-1-490(c) for banks and O.C.G.A. § 14-2-830(c) and § 14-2-842 (c) for corporations, signed by Governor Nathan Deal on May 9, 2017 became effective as of July 1, 2017 impacts all businesses in Georgia including those in the construction industry. This bill clarifies the Business Judgment Rule in Georgia by creating a statutory presumption that a director or officer’s decision-making process is conducted in good faith, through the exercise of ordinary care. The “business judgment rule” relieves officers and directors from liability for acts or omissions taken in good faith, in compliance with their corporate duties. The presumption created by House Bill 192 may, however, be rebutted by evidence that a director or officer’s decision-making process was grossly negligent, defined as a “gross deviation of the standard of care of a director or officer in a like position under similar circumstances.”

2014 Case Weakened Georgia’s Business Judgment Rule:  House Bill 192 was initiated as a response to the Supreme Court’s 2014 decision in FDIC v. Loudermilk. Prior to that decision, Georgia’s application of the business judgment rule mirrored that of other business-friendly states, namely Delaware. Historically, decisions of directors and officers had been protected under the business judgment rule, which protected good faith decision making from second guessing by courts and juries. The policy behind this, of course, stemmed from the recognition that officers and directors are, in most cases, more qualified to make business decisions than are judges and juries. Brock Build v. Blake, 300 Ga. App. 816, 686 S.E.2d 425 (2009). However, the Georgia Supreme Court held in Loudermilk that despite the existence of a strong business judgment rule in Georgia, the business judgment rule did not repeal or replace Georgia’s statutory standards of care requiring ordinary negligence. This interpretation by the Court resulted in the possibility for directors and officers to be sued for claims premised on ordinary negligence in the decision-making process. In response, Georgia businesses responded appropriately with concerns that, in addition to exposing the directors and officers of already-existing Georgia corporations to heightened vulnerability, such increased risk of litigation would discourage new businesses and foreign corporations from incorporating or doing business within the State.

2017’s New Law Strengthens Georgia’s Business Judgment Rule:  House Bill 192 addresses the Court’s negative decision in Loudermilk.. By applying the business judgment rule’s gross negligence standard, House Bill 192 encourages prosperity through incorporation of new companies into Georgia, creating opportunities for further economic growth and success. It should be noted that the actual standard of care required of directors and officers is relatively unchanged: in order to claim the protection of the business judgment rule, directors and officers still have a duty to inform themselves prior to making a business decision, which requires an understanding and familiarity with all facts relevant to the specific decision at issue, and must act with requisite care in the performance of their duties. Rather, it is the standard of review which the courts will apply in evaluating the decision-making process of directors and officers that has been changed. Still, this remains hugely significant. By requiring a showing of gross negligence, House Bill 192 should discourage frivolous lawsuits and will provide defendants with a strong defense when such lawsuits are filed.

House Bill 192 also permits directors and officers to rely on “information, data, opinions, reports, or statements,” as well as performance, provided by other officers, employees, agents, and similar parties as to relevant matters reasonably believed to be reliable and within the scope or area of expertise of such party’s profession. Previously, officers and directors were not permitted to rely on the performance of others. This clarification and amendment will enable officers and directors to perform their duties more effectively and efficiently, allowing them to make reasonable decisions without fear of being held personally liable.

Georgia Remains a Business Friendly State.  In summary, House Bill 192 returns Georgia to its previous status as a business-friendly state. In addition to bringing Georgia practices back into conformity with those of other business-friendly states, House Bill 192 promotes an environment that facilitates reasonable decisions by corporate officers and directors. This Bill should enhance the ability of businesses incorporated in Georgia to retain qualified officers and directors, and should also have a noticeable impact on the growth and incorporation of companies within the State, which in turn will continue to grow Georgia’s economy and prosperity.

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