On July 1, 2017, significant amendments to the director and officer liability provisions of Georgia’s Financial Institution Code and Business Corporation Code will take effect. These amendments, adopted as House Bill 192 during the 2017 General Assembly session and signed into law by Governor Deal in May, enhance the protections available to directors and officers of Georgia banks when they are sued for violating their duty of care to the bank. The amendments also apply to directors and officers of Georgia corporations, including bank holding companies.
First and foremost, House Bill 192 creates a statutory presumption, codified at O.C.G.A. § 7-1-490(c) for banks and at O.C.G.A. §§ 14-2-830(c) and 14-2-842(c) for corporations, that a director or officer’s decision-making process was done in good faith and that the director or officer exercised due care. This presumption may be rebutted, however, by evidence that the process employed was grossly negligent, thus effectively creating a gross negligence standard of liability in civil lawsuits against directors and officers. This is a response to the Supreme Court’s 2014 decision in FDIC v. Loudermilk, in which the Court recognized the existence of a strong business judgment rule in Georgia but also held that it did not supplant Georgia’s statutory standards of care requiring ordinary diligence. The Court interpreted the statutes as permitting ordinary negligence claims against directors and officers when they are premised on negligence in the decision-making process. (As you may recall, Loudermilk also held emphatically that claims challenging only the wisdom of a corporate decision, as opposed to the decision-making process, cannot be brought absent a showing of fraud, bad faith or an abuse of discretion. This part of the Loudermilk decision is unaffected by the new amendments.) Many Georgia banks and businesses expressed concern that allowing ordinary negligence suits would open the door to dubious and harassing litigation. The Court’s opinion noted these concerns but held that they were for the General Assembly to address.
As amended, O.C.G.A. § 7-1-490(c) and its corporate code counterparts will foreclose the possibility of ordinary negligence claims by requiring a plaintiff (which can be a shareholder, the bank or corporation itself, or a receiver or conservator) to show evidence of gross negligence, which the statutes define as a “gross deviation of the standard of care of a director or officer in a like position under similar circumstances.” It is important to note that the actual standard of care that directors and officers must exercise is essentially unchanged. As we have written in the past, it is important for a bank board in today’s legal and business environment to develop careful processes for all decisions that are entrusted to the board, and to follow those processes. A director should attend board meetings with reasonable regularity and should always act on an informed basis, which necessarily entails understanding the bank’s business, financial condition and overall affairs as well as facts relevant to the specific decision at issue. The new amendments should not be read as relaxing these requirements. The only thing that has changed is the standard of review that courts will follow when evaluating a process-related duty of care claim. By requiring plaintiffs to show gross negligence in order to defeat the statutory presumption, the amended statute should discourage the filing of dubious lawsuits, and also provide defendants with a strong basis for moving to dismiss such suits when they are filed. Many states, including Delaware, recognize a gross negligence floor for personal liability either by statute or under the common law. The amendments bring Georgia law more closely in line with these states.