Last week, Georgia Governor Nathan Deal signed into law House Bill 192 (the "Bill"), which amends both the Georgia Business Corporation Code and the Financial Institutions Code of Georgia to strengthen the business judgment rule applicable to directors and officers of Georgia corporations and banks. The Bill, which provides that the relevant liability standard for officers and directors in carrying out their fiduciary duty of care is "gross negligence," brings the protections afforded under Georgia's business judgment rule in line with most other business-friendly states, such as Delaware. Accordingly, the Bill should be expected to have a positive impact on the growth and formation of Georgia businesses.

The business judgment rule creates a rebuttable presumption that, in making a business decision, directors or officers acted in accordance with their fiduciary obligations on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company and its shareholders. In most states, including Delaware, the business judgment rule effectively precludes claims against directors and officers that are based on ordinary negligence—a plaintiff can only overcome the business judgment rule presumption if he or she can show "gross negligence" on the part of the directors or officers. Prior to 2014, Georgia practitioners believed that the analysis of Georgia's business judgment rule followed that of such other states. In the 2014 case FDIC v. Loudermilk, however, the Georgia Supreme Court held that although the business judgment rule precluded ordinary negligence claims in which the alleged negligence was the wisdom (or lack thereof) of the business decision itself, the rule did not preclude ordinary negligence claims in which the alleged negligence consisted of an inadequate process through which the decision was made.1

The Bill was enacted as a direct response to the Loudermilk Court's interpretation of the business judgment rule. The Bill amends sections of the Financial Institutions Code and Corporations Code by adding provisions 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.2

In effect, the Bill establishes a uniform gross negligence standard for claims challenging the exercise of the duty of care by directors and officers, thereby precluding ordinary negligence claims against directors and officers.

The Bill brings Georgia law into conformity with states such as Delaware, lowers the likelihood of director and officer liability, and should subject most fiduciary duty claims against directors and officers to early dismissal. Consequently, the Bill should have a positive impact on Georgia businesses and financial institutions, including greater retention of qualified directors and officers by Georgia businesses, an increase in reasonable and financially beneficial risk-taking by such directors and officers, and an increase in the number of businesses choosing to incorporate in Georgia.

Footnotes

1.761 S.E.2d 332, 338 (Ga. 2014).

2.HB 192, 2017-2018 Reg. Sess. (Ga. 2017). The language provided amends O.C.G.A. § 7-1-490, which relates to the responsibilities of directors and officers of bank and trust companies. Nearly identical language was added to O.C.G.A. §§ 14-2-830 and 14-2-842, which relate to directors and officers of corporations, respectively.

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