The most recent amendments to Ohio’s corporate statute, which became effective on July 6, 2016, include a provision enhancing the protections afforded to officers of Ohio corporations. New Section 1701.641 of the Revised Code provides officers of Ohio corporations with limitations on personal liability and business judgment rule protections substantially identical to those that have long been provided to directors of Ohio corporations.
Under Ohio’s corporate statute, directors have significant authority. In the absence of a statutory or charter restriction, Section 1701.59(A) of the Revised Code provides that “all of the authority of a corporation shall be exercised by or under the direction of its directors.” In keeping with this broad grant of authority, Ohio also imposes fiduciary duties of loyalty and due care on corporate directors. Section 1701.59(B) of the Revised Code provides that directors must act “in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.”
Despite their significant responsibilities, Ohio directors also enjoy substantial protections from liability. Under Section 1701.59(D) of the Revised Code, directors may be found to have breached their fiduciary duties only if a plaintiff can rebut the business judgment rule’s presumption in their favor by establishing a violation of those duties by clear and convincing evidence. Furthermore, Section 1701.59(E) limits directors’ liability for money damages to breaches of the duty of loyalty, and then only if a plaintiff can demonstrate clear and convincing evidence of intentional or reckless misconduct.
Corporate officers have traditionally occupied a very different status than corporate directors, and while their fiduciary duties are generally the same, their exposure to liability in most states is potentially much greater. Most states do not provide officers with limitations on liability or the presumptions of the business judgment rule that are routinely provided to directors.
In the years following the financial crisis, plaintiffs have increasing sought to exploit the differences in liability exposure by bringing actions against officers alleging breaches of fiduciary duty. The Federal Deposit Insurance Corporation has been particularly active in this area. The FDIC has aggressively pursued actions against officers in connection with bank failures, and has frequently asserted that these officers are not entitled to the protection of the business judgment rule, and that they may be held liable for simple negligence.
With the enactment of Section 1701.641, the Ohio legislature has leveled the playing field for corporate officers. Absent charter or contractual provisions to the contrary, officers of an Ohio corporation now are entitled to substantially the same business judgment rule protections and limitations on liability as those provided to directors. In an environment where actions of fiduciaries are subject to greater scrutiny by a variety of constituencies, this is a welcome development for officers of Ohio corporations.