Closing a gap in its General Corporation Law, the Ohio legislature has for the first time enacted into statute the fiduciary duties owed by officers to their corporations and the burden of proof faced by claimants alleging violations of those duties. The new law went into effect on July 6, 2016 and will apply automatically without any requirement for corporate enabling action.
The newly defined duties, set forth in new Section 1701.641 of the Ohio Revised Code, include both a duty of due care and a duty of loyalty. These officer duties are effectively identical to the long-established fiduciary duties of corporate directors found in Section 1701.59. Both the old and new statutory provisions reflect Ohio’s determination that directors, and now officers as well, will enjoy the protection of the business judgment rule in all circumstances, without facing the enhanced standards and burden shifting that often critically weaken the protection afforded by common-law business judgment rules in other states, most notably Delaware, just when corporate actors need it most.
The liability shield for officers in Section 1701.641 also employs the same principles as those set forth in Section 1701.59 for directors. At a minimum, an officer must perform his or her duties in good faith, in a manner the officer reasonably believes to be in or not opposed to the corporation’s best interests, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. To overcome the presumption of the business judgment rule, a plaintiff must prove a violation of these duties by clear and convincing evidence. Further, an officer will only be liable for money damages if the plaintiff presents clear and convincing evidence that the officer acted with deliberate intent to hurt the corporation or with reckless disregard for the corporation’s best interests.
Corporations, by board action, can impose heavier fiduciary duties on officers, whether through provisions in the articles or regulations or by contract. Section 1701.641(E) additionally makes clear that an officer remains subject to liability as before for actions taken in any non-officer capacity. Thus, an officer who is party to an employment agreement or subject to corporate policies that impose enhanced standards will still be liable for failures to comply with those obligations.
In practice, corporations – in particular larger public companies – motivated in part by their own interest in attracting and retaining the executive talent they need, have often protected their officers in other ways, for example, director and officer insurance and officer indemnification agreements. It has also generally not been the case that non-director officers are universally numbered among the defendants in shareholder actions arising out of takeover attempts, alleged securities fraud and other corporate controversies involving fiduciary-duty issues. Nonetheless, the new provisions provide clarity and a degree of comfort in these matters that has long been available to directors of Ohio corporations and will be welcomed particularly by officers of smaller and private corporations who may otherwise lack access to the full defensive arsenal routinely available to their public-company counterparts.
Along with adopting new Section 1701.641, the legislature also amended existing Sections 1701.56 and 1701.64 of the Ohio Revised Code to provide that the chairperson of an Ohio corporation will not also be an officer of the corporation unless the corporation’s articles or regulations, or board resolutions, provide otherwise. These amendments flip the previous statutory default: until now, the chairperson, if any, was automatically an officer of the corporation. As was also true prior to these amendments, there is no affirmative requirement that a corporation have a chairperson, and the decision on that point remains a matter for board determination. In the case of larger corporations that routinely combine the chair and CEO positions, these amendments will make little practical difference, but they would otherwise facilitate the practice, common in Europe but also popular among some shareholder activists in the United States, of separating the CEO and chair functions into distinct executive and non-executive positions held by different people.