Did the Georgia Legislature Just Delete the Corporate Duty of Loyalty?

On May 9, 2017, Governor Deal signed House Bill 192 into law.  For claims arising after July 1, 2017, O.C.G.A. §§ 14-2-830(a) (directors); 14-2-842(a) (officers) will provide:

A [director or officer] shall discharge his perform his or her duties as a [director or officer], including his duties as a member of a committee: (1) In a manner he believes in good faith to be in the best interests of the corporation; and with the degree of (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances. 

That strike through of “to be in the best interests of the corporation” is pretty stark, right?  Perhaps all of an officer’s or director’s duty of loyalty to a company will be placed in the duty of good faith.  But perhaps the legislature wanted to bar an end-run around its duty-of-care enactment by narrowing the statutory duty of loyalty to violations of O.C.G.A. § 14-2-861(interested party transactions) and O.C.G.A. § 14-2-832 (unlawful distributions), which are still prohibited.  Time will tell…

The main thrust of the legislative amendment was to enhance protections for corporate decision making by adding this text:

There shall be a presumption that the process [a director or officer] followed in arriving at decisions was done in good faith and that such [director or officer] has 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.

O.C.G.A. §§ 14-2-830(c) (directors); 14-2-842(c) (officers).

These amendments are a response to FDIC v. Loudermilk, in which the Georgia Supreme Court held that the substance or wisdom of a corporate decision was unreviewable in court absent gross misconduct.  295 Ga. 579, 581 (2014).  But the Court also held that in order to obtain deference for their decisions, corporate actors’ process for making their decisions was reviewable under a simple negligence standard: officers and directors “may be liable for a failure to exercise ordinary care with respect to the way in which business decisions are made.”  Id. at 593.

In amending the statute, the legislature addressed the obvious point that deference to ultimate corporate decisions is of little value if the there is no deference to the decision-making process.  Once this law is in effect, corporate officers and director are presumed to have acted in good faith in the process used to make business decisions.

If you want to know more, look out for a more in-depth treatment in our next firm newsletter.

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