On Tuesday, Governor Nathan Deal signed into law a change to Georgia’s business judgment rule. The legislation, which was supported by the Georgia Bankers Association and the Georgia Chamber of Commerce, purports to modernize Georgia’s business judgment rule and enhance liability protection for the decision-making process used by executive officers and members of the boards of directors of both banks and Georgia corporations. The new law takes effect on July 1, 2017.
The House Bill 192 was introduced in the legislature to address the Georgia Supreme Court’s 2014 decision, FDIC v. Loudermilk, in which the Georgia Supreme Court effectively bifurcated the analysis of how to apply Georgia’s business judgment rule.1 The business judgment rule affords officers and directors a presumption of good faith and ordinary care in the performance of their duties. The court held that officers and directors could only be held liable where there was evidence of gross negligence regarding the wisdom of the decisions made by a defendant. However, the court stated that claims that allege ordinary negligence in the process by which those decisions are made were permissible. While the decision arose in the context of a failed Georgia bank, the business judgment rule analysis applies equally to Georgia corporations.
The implications of the new bifurcated analysis were brought to bear last October in the underlying litigation where the Federal Deposit Insurance Corporation (FDIC) was awarded a verdict of $4.98 million in a case brought against defendants, who were the former officers and directors and of the failed Buckhead Community Bank of Buckhead, Georgia.2 There, the FDIC had asserted claims based on the officers’ and directors’ decision-making process, alleging in the complaint that defendants engaged in “numerous, repeated, and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements and banking regulations, and prudent and sound banking practices.”
While it has always been considered best practices for officers and directors to approach their decision-making process thoughtfully and diligently, the concerns of the business and banking communities following the Georgia Supreme Court’s decision in Loudermilk were that the bifurcated analysis would allow for claims against an entity’s officers and directors to more easily reach a jury where verdicts could be imposed based on a hindsight analysis of “poor” judgment, which is exactly what the business judgment rule was designed to protect against. Indeed, Justice Keith Blackwell, in writing the opinion in Loudermilk, seemed to invite the legislature to consider whether “more protection for officers and directors is desirable” and address such concerns accordingly.
House Bill 192 sought to bring Georgia’s business judgment rule analysis in line with most other states that analyze both the decisions of directors as well as the decision-making process under a gross negligence standard. The bill amended both the provisions of the Official Code of Georgia governing banks and bank trust companies as well as the Georgia Code provision discussing the standards of conduct for officers and directors of corporations.
In significant part, both the banking code and the corporate code are amended to include a presumption that the process undertaken has been conducted in good faith unless evidence that demonstrates gross negligence is presented. Specifically, O.C.G.A. § 7-1-490(c), the relevant banking code provision, and O.C.G.A. § 14-2-830(c), the relevant provision applicable to officers and directors of Georgia corporations, include almost identical language stating:
There shall be a presumption that the process directors and officers followed in arriving at decisions was done in good faith and that such directors and officers have exercised ordinary care; provided, however, that this presumption may be rebutted by evidence that such process constitutes gross negligence by being a gross deviation of the standard of care of a director or officer in a like position under similar circumstances.3
The policy considerations voiced by the Georgia Bankers Association, the Georgia Chamber of Commerce and others included concerns that it would be difficult to recruit and retain directors who feared liability for decisions that did not yield high results. There were also concerns that directors who were willing to serve would demand to be removed from certain levels of decisions so that their decision-making process would not have to be second guessed by courts and juries. The new law is therefore heralded as removing barriers toward willingness to serve as directors for banks and corporations alike.
In addition to combating the reluctance of talented individuals to serve as officers and directors of corporations and banks, the new law could encourage companies to incorporate in Georgia rather than in other states that employ a more favorable gross negligence standard.
Overall, Georgia’s newly codified business judgment rule provides protection for officers and directors against liability arising out of ordinary negligence. The new law encourages officers and directors to employ a sound decision-making process that could combat a claim for gross negligence, rather than discouraging these individuals from making decisions or accepting decision-making positions out of fear of their inability to combat a claim for ordinary negligence.
1 Fed. Deposit Ins. Corp. v. Loudermilk, 295 Ga. 579 (2014). For additional discussion of this decision, see “Georgia Supreme Court Applies the Business Judgment Rule to Bank Officers and Directors,” available at https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/165345/Legal-Alert-Georgia-Supreme-Court-Applies-the-Business-Judgment-Rule-to-Bank-Officers-and-Directors-Decision-Has-Implications-for-Corporate-Officers-and-Directors.
2 FDIC v. Loudermilk et al., Civil No. 1:12-cv-4156 (N.D.Ga. Oct. 25, 2016).
3 O.C.G.A. § 7-1-490 (effective July 1, 2017). The relevant provision of the corporate code differs only slightly and contains the same presumption and standard for rebutting such presumption.