The business judgment rule is the answer to most questions asked in a law school corporations class exam. At least that’s how I remember it. But the Supreme Court of Georgia issued an important decision in FDIC v. Loudermilk et al. which narrows the business judgment’s rule’s protection of officers and directors of banks.
First, let’s figure out what the business judgment rule actually is. Broadly speaking, the business judgment rule acts a shield for business owners who use their own judgment to make business decisions, even if the consequence of those decisions are catastrophic for the corporate entity or shareholders of the corporation. Specifically, the Georgia Supreme Court indicated that the business judgment rule “precludes claims against officers and directors for their business decisions that sound in ordinary negligence.” However, the business judgment rule does not protect decisions “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.”
Accordingly, the Supreme Court found that the business judgment rule protects many business judgments from claims of ordinary negligence. The rule, however, does not protect an officer or director form an ordinary negligence claim if the claim is premised upon insufficient diligence on the part of the officer or director to acquire the facts necessary to make a decision. The Georgia Supreme Court also found that this interpretation of the business judgment rule would apply to all corporations and not just banks.
The Georgia Supreme Court’s decision creates a tricky landscape for business owners to navigate. While a business owner is protected by the business judgment rule in some (even most) circumstances, there are meaningful exceptions which can create liability issues.
Given the Loudermilk decision, corporations in Georgia need general counsel now more than ever. Titus Law provides legal advice to corporations of every size and can help you navigate Georgia law and add value to your business practices.