New Georgia Law Strengthens Business Judgment Rule

Last week, Georgia Governor Nathan Deal signed into law House Bill 192 (the "Bill"), which amends both the Georgia Business Corporation Code and the Financial Institutions Code of Georgia to strengthen the business judgment rule applicable to directors and officers of Georgia corporations and banks. The Bill, which provides that the relevant liability standard for officers and directors in carrying out their fiduciary duty of care is "gross negligence," brings the protections afforded under Georgia's business judgment rule in line with most other business-friendly states, such as Delaware. Accordingly, the Bill should be expected to have a positive impact on the growth and formation of Georgia businesses.

The business judgment rule creates a rebuttable presumption that, in making a business decision, directors or officers acted in accordance with their fiduciary obligations on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company and its shareholders. In most states, including Delaware, the business judgment rule effectively precludes claims against directors and officers that are based on ordinary negligence—a plaintiff can only overcome the business judgment rule presumption if he or she can show "gross negligence" on the part of the directors or officers. Prior to 2014, Georgia practitioners believed that the analysis of Georgia's business judgment rule followed that of such other states. In the 2014 case FDIC v. Loudermilk, however, the Georgia Supreme Court held that although the business judgment rule precluded ordinary negligence claims in which the alleged negligence was the wisdom (or lack thereof) of the business decision itself, the rule did not preclude ordinary negligence claims in which the alleged negligence consisted of an inadequate process through which the decision was made.1

The Bill was enacted as a direct response to the Loudermilk Court's interpretation of the business judgment rule. The Bill amends sections of the Financial Institutions Code and Corporations Code by adding provisions stating:

There shall be a presumption that the process directors and...