[W]hen a business decision is alleged to have been made negligently, the wisdom of the decision is ordinarily insulated from judicial review, and as for the process by which the decision was made, the officers and directors are presumed to have acted in good faith and to have exercised ordinary care. . . . Although this presumption may be rebutted, the plaintiff bears the burden of putting forth sufficient evidence to rebut it.
FDIC v. Loudermilk, S14Q0454, Georgia Supreme Court (July 11, 2014), slip op. at 33 (“Loudermilk”).
And so the business judgment rule stands in Georgia following the Georgia Supreme Court’s recent decision in Loudermilk.
Never having squarely addressed the applicability or the scope of the business judgment rule previously, the Georgia Supreme Court received that opportunity when the U.S. District Court for the Northern District of Georgia certified the following question to the Court:
Does the business judgment rule in Georgia preclude as a matter of law a claim for ordinary negligence against the officers and directors of a bank in a lawsuit brought by the FDIC as receiver for the bank?
The Court answered the question a clear and resounding, “No.”
Overruling two earlier Georgia Court of Appeals decisions, Flexible Products Co. v. Ervast, 284 Ga. App. 178 (2007) and Brock Built, LLC v. Blake, 300 Ga. App. 816 (2009) to the extent they held otherwise, the Georgia Supreme Court also held that the business judgment rule is not a bar against ordinary negligence claims by non-bank officers and directors.
Instead, while a plaintiff may not attack the wisdom of a decision itself, the plaintiff may attack the way the decision was made. The business judgment rule “precludes claims against officers and directors for their business decisions that sound in ordinary negligence, except to the extent that those decisions are shown to have been made without deliberation, without the requisite diligence to ascertain and assess the facts and circumstances upon which the decisions are based, or in bad faith.” Loudermilk at 13. Directors and officers may make unwise decisions, but they will not be liable for those decisions if their decisions were deliberately based on judgment informed by actual analysis.
The lesson from Loudermilk – for officers and directors, bank and non-bank alike – is that they must undertake and appropriately document a careful process to reach a decision. Merely voting blindly will not suffice; the officer or director must undertake some investigation, some deliberation. The Court emphasized that “the business judgment rule does not insulate ‘mere dummies or figureheads,’ from liability . . .” Loudermilk, slip op. at 33.
Focusing on the bank directors in this case, the Court turned to O.C.G.A. § 7-1-490(a) for the requisite standard. There, the legislature had made clear that in the banking area, an officer or director, in good faith, may rely on “information, opinions, reports, or statements, including financial statements or other financial data” that was prepared by the bank’s employees whom the officer or director trusts, attorneys, accountants or other professionals, or a special committee designated to handle a specific matter. Thus, a plaintiff challenging a bank officer’s or director’s action must show that the officer or director did not, in good faith, rely on the permitted information from a permitted source.
Although the Court was not required to address the statutory equivalent or the common law business judgment rule for non-bank officers and directors, the Court cited and quoted from the similar statutory provisions that apply to directors and officers of business corporations and expressly overruled the Flexible Products and Brock Built cases for officers and directors of business corporations, too.
In sum, the business judgment rule in Georgia is not a complete common law shelter from director and officer liability, but it is a significant bulwark for directors and officers who exercise their responsibilities carefully and diligently.