2020 Georgia Code
Title 14 - Corporations, Partnerships, and Associations
Chapter 2 - Business Corporations
Article 8 - Directors and Officers
Part 3 - Standards of Conduct
§ 14-2-830. General Standards for Directors; Presumption of Good Faith and Ordinary Care

1. A director shall perform his or her duties as a director in good faith and with the degree of care an ordinarily prudent person in a like position would exercise under similar circumstances.
2. In performing his or her duties a director may rely upon:
   1. Other officers, employees, or agents of the corporation whom the director reasonably believed to be reliable and competent in the functions performed; and
   2. Information, data, opinions, reports, or statements provided by officers, employees, agents of the corporation, legal counsel, public accountants, investment bankers, or other persons as to matters involving the skills, expertise, or knowledge reasonably believed to be reliable and within such person's professional or expert competence.
3. There shall be a presumption that the process a director followed in arriving at decisions was done in good faith and that such director has exercised ordinary care; provided, however, that this presumption may be rebutted by evidence that such process constitutes gross negligence by being a gross deviation of the standard of care of a director in a like position under similar circumstances.
4. Nothing contained in this Code section shall:
   1. In any instance when fairness is at issue, such as consideration of the fairness of a transaction to the corporation as evaluated under paragraph (3) of subsection (b) of Code Section 14-2-861, alter the burden of proving the fact or lack of fairness otherwise applicable;
   2. Alter the fact or lack of liability of a director under the Official Code of Georgia Annotated, including the governance of the consequences of an unlawful distribution under Code Section 14-2-832 or a conflicting interest transaction under Code Section 14-2-861;
   3. Affect any rights to which the corporation or its shareholders may be entitled under another law of this state or of the United States; or
   4. Deprive a director of the applicability, effect, or protection of the business judgment rule.

(Code 1981, §14-2-830, enacted by Ga. L. 1988, p. 1070, § 1; Ga. L. 2017, p. 693, § 2/HB 192.)

The 2017 amendment, effective July 1, 2017, rewrote this Code section. See Editor's notes for applicability.

- Duty of board of directors in protecting insureds, creditors and the general public regarding investments, § 33-11-54.

- Ga. L. 2017, p. 693, § 4/HB 192, not codified by the General Assembly, provides that: "This Act shall apply only to causes of action arising on or after July 1, 2017."

- For article discussing corporation director's liability for improper payments to shareholders, see 3 Ga. L. Rev. 11 (1968). For article discussing liability of corporate directors, officers, and shareholders under the Georgia Business Corporation Code, and as affected by provisions of the Georgia Civil Practice Act, see 7 Ga. St. B. J. 277 (1971). For article, "Corporate Governance in the Aftermath of the Insurance Crisis," see 39 Emory L.J. 1155 (1990). For article, "Some Distinctive Features of the Georgia Business Corporation Code," 28 Ga. St. B. J. 101 (1991). For survey article on trial practice and procedure, see 59 Mercer L. Rev. 423 (2007). For annual review of Georgia Corporation and Business Organization Law, see 15 (No. 7) Ga. St. B. J. 20 (2010). For annual survey of law on business associations, see 62 Mercer L. Rev. 41 (2010). For article, "2013 Georgia Corporation and Business Organization Case Law Developments," see 19 Ga. St. B. J. 28 (April 2014). For article, "Excessive Corporate Risk-Taking and the Decline of Personal Blame," see 65 Emory L.J. 533 (2015). For article, "2014 Georgia Corporation and Business Organization Case Law Developments," see 20 Ga. St. B. J. 26 (April 2015). For article on the 2017 amendment of this Code section, see 34 Ga. St. U.L. Rev. 1 (2017). For annual survey on trial practice and procedure, see 69 Mercer L. Rev. 321 (2017). For annual survey on business associations, see 70 Mercer L. Rev. 19 (2018). For comment, "Poison Pills: Are Dead Hand Pills Dead in Georgia?," see 50 Mercer L. Rev. 809 (1999).

Source: Model Act, § 8.30.

Section14-2-830 defines the general standard of conduct for directors. It sets forth the standard by focusing on the manner in which the director performs his duties, not the correctness of his decisions. Section14-2-830(a) thus requires a director to perform his duties in the good faith belief that he acts in the best interests of the corporation and with the care of an ordinarily prudent person in a like position. This standard is based on former Section 35 of the 1969 Model Act, as previously adopted in Georgia, as former § 14-2-152.1, as amended, Act 657, Laws 1987, § 14-2-1 This, in turn, was drawn from the 1969 Model Act, Section 35, as amended in 1974. In adopting this formulation in 1987, Georgia preserved its former formulation, in § 14-2-152, which was drawn from New York Bus. Corp. Law § 717 (see the discussion of subsection (a) below).

In determining whether to impose liability, the courts recognize that boards of directors and corporate managers continuously make decisions that involve the balancing of risks and benefits for the enterprise. Although some decisions turn out to be unwise or the result of a mistake of judgment, it is unreasonable to reexamine these decisions with the benefit of hindsight. Therefore, a director is not liable for injury or damage caused by his decision, no matter how unwise or mistaken it may turn out to be, if in performing his duties he met the requirements of Section 14-2-830.

Even before statutory formulations of directors' duty of care, courts sometimes invoked the business judgment rule in determining whether to impose liability in a particular case. In doing so, courts have sometimes used language similar to the standards set forth in Section 14-2-830(a). The elements of the business judgment rule and the circumstances for its application are continuing to be developed by the courts. In view of that continuing judicial development, Section 14-2-830 does not try to codify the business judgment rule or to delineate the differences, if any, between that rule and the standards of director conduct set forth in this section. That is a task left to the courts.

The Code preserves the approach of prior law in permitting contractual variation of directors' liabilities. Thus Section 14-2-202(b)(4) permits the articles of incorporation to relieve directors from liability to the corporation or its shareholders for breaches of the duty of care set out in Section 14-2-830(a)(2). Similarly, where such exculpation has not been provided in advance, shareholders can indemnify directors for such liability under Section 14-2-856.

The statement of the director's duties in subsection (a) follows former Georgia law more closely than the Model Act. It preserves the "good faith" description of the duty of loyalty. But where former law required only a general "good faith," this formulation specifies the object of the good faith - the best interests of the corporation.

Subsection (a)(2) establishes a general standard of care for all directors. It requires a director to exercise "the care an ordinarily prudent person in a like position would exercise." Subsection (a) does not use the term "fiduciary" because that term could be confused with the unique attributes and obligations of a fiduciary imposed by the law of trusts, some of which are not appropriate for directors of a corporation.

Subsection (a)'s reference to "ordinary prudent person" recognizes the need for innovation, essential to profit orientation, and focuses on the basic director attributes of common sense, practical wisdom, and informed judgment. The phrase "in a like position" recognizes that the "care" under consideration is that which would be used by the "ordinarily prudent person" if he or she were a director of the particular corporation. The combined phrase "in a like position . . . under similar circumstances" is intended to recognize that (a) the nature and extent of responsibilities will vary, depending upon such factors as the size, complexity, urgency, and location of activities carried on by the particular corporation, (b) decisions must be made on the basis of the information known to the directors without the benefit of hindsight, and (c) the special background, qualifications, and management responsibilities of a particular director may be relevant in evaluating his compliance with the standard of care. Even though the quoted phrase takes into account the special background, qualifications and management responsibilities of a particular director, it does not excuse a director lacking business experience or particular expertise from exercising the common sense, practical wisdom, and informed judgment of an "ordinarily prudent person." As Learned Hand wrote in Barnes v. Andrews, 298 F. 614 (S.D.N.Y. 1924), directors "need not - indeed, perhaps they should not - have any technical talent."

Subsection (a)(3) of the Model Act, which required a director to act "in a manner he reasonably believes to be in the best interests of the corporation," was deleted from the Code as a departure from existing Georgia law. The Code combined the requirements of Model Act subsections (a)(1) and (a)(3), to require a good faith belief, rather than separate requirements of good faith and a reasonable belief. The reasonableness of the board's action is to be tested in the totality of the situation. Thus the belief that action is in the best interests of the corporation is a facet of the good faith requirement. The good faith must relate to the director's belief that the action is in the best interests of the corporation. The "reasonably believes" language was omitted because it could have the effect of isolating a specific piece of information, or a specific source of information.

Subsection (b) provides that a director complying with the standards expressed in Section 14-2-830(a) is entitled to rely upon information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by the persons or committees described in subsection (b). The right to rely under this section applies to the entire range of matters for which the board of directors is responsible. Under subsection (c), however, a director so relying must be without knowledge concerning the matter in question that would cause his reliance to be unwarranted. Implicit in this is the understanding that directors are not required to be suspicious of employees and experts they have hired in good faith.

Subsection (b) permits reliance upon outside advisers, including not only those in the professional disciplines customarily supervised by state authorities, such as lawyers, accountants, and engineers, but also those in other fields involving special experience and skills, such as investment bankers, geologists, management consultants, actuaries, and real estate appraisers. The concept of "expert competence" in subsection (b)(2) embraces a wide variety of qualifications and is not limited to the more precise and narrower recognition of experts under the Securities Act of 1933.

Subsection (b)(2) of the Model Act was amended by adding a reference to investment bankers as experts upon whom directors may rely, if the matter is within their professional competence. This preserves former law.

Subsection (b) permits reliance upon a committee of the board of directors, whether performing supervisory or other functions, as well as in instances where either the full board of directors or the committee take dispositive action. In conditioning reliance upon reasonable belief that the board committee merits the director's "confidence," subsection (b)(3) recognizes a difference between a board committee and an expert. In subsection (b)(1) and (2) the reference is to "competence of an expert," which recognizes the expectation of experience and in most instances technical skills on the part of those upon whom the director may rely. In subsection (b)(3), the concept of "confidence" is substituted for "competence" in order to avoid any inference that technical skills are a prerequisite.

By identifying those upon whom a director may rely in discharging his duties, Section 14-2-830(b) does not limit the ability of directors to delegate their powers under Section 14-2-801(a) to committees of the board of directors or officers of the corporation, except where this delegation is expressly prohibited by the Act. Delegation should be carried out in accordance with the standards set forth in subsection (a). See also Section 14-2-825 and its Comment with respect to delegation to committees.

Subsection (c) expressly prevents a director from "hiding his head in the sand" and relying on information, opinions, reports, or statements when he has actual knowledge which makes reliance unwarranted.

Subsection (d) is self-executing, and the individual director's exoneration from liability is automatic, if compliance with the standard of conduct set forth this section is established. Like the exculpation provisions of Section14-2-202(b) (4) and the indemnification provisions of Section14-2-856, it provides relief only from liability to the corporation or the shareholders. The Model Act provision was amended by the addition of the phrase "to the corporation or to its shareholders," to emphasize the limits of this provision. Section14-2-830 is intended to regulate only relationships among the participants in the corporate enterprise - shareholders, directors, and the corporation itself. As was stated in the Comment to the comparable statement of directors' duties and liabilities in the American Law Institute's Principles of Corporate Governance: Analysis and Recommendations (T.D. No. 4), § 14-2-401, at 12:

"The duty of care standards set forth in § 14-2-401 involve duties owed directly to the corporation. It should be emphasized that § 14-2-401 is not intended to create new third-party rights (e.g., for tort claimants or government agencies) against directors or officers. The standards set forth in Part IV apply only to the relationships among directors, officers, shareholders, and their corporations."

Where the standards of this section are met, there is no need to consider possible application of the business judgment rule. The possible application of the business judgment rule need only be considered if compliance with the standard of conduct set forth is not established. Subsection (d) makes clear that this subsection will apply whether or not affirmative action was in fact taken. Subsection (d) applies (assuming its requirements are satisfied) to any conscious consideration or matters involving the affairs of the corporation. It also applies to the determination by the board of directors of which matters to address and which not to address. Section 14-2-830(d) does not apply only when the director has failed to consider taking action which under the circumstances he is obliged to consider taking.

Section 14-2-830 generally deals only with directors. Section 14-2-842 and its Comment explain the extent to which the provisions of Section 14-2-830 apply to officers.

Cross-References Committees of board of directors, see § 14-2-825. Conflict of interest, see § 14-2-860 et seq. Derivative proceedings, see § 14-2-740. Duty of board of directors, see § 14-2-801. Exculpation, see § 14-2-202. Indemnification, see § 14-2-850 et seq. Meetings of board of directors, see §§ 14-2-820 &14-2-821. Officer standards of conduct, see § 14-2-842. Officers, see §§ 14-2-840 &14-2-841. Quorum of directors, see § 14-2-824. Removal of directors, see § 14-2-808. Unlawful distributions, see § 14-2-831.

JUDICIAL DECISIONS

Editor's notes.

- In light of the similarity of the statutory provisions, decisions under former Code 1933, § 22-713 and former Code Section 14-2-152, which were repealed by Ga. L. 1988, p. 1070, § 1, effective July 1, 1989, are included in the annotations for this Code section.

- A director serves the interests of the entire body of stockholders, as well as those of the individual shareholder. Therefore, a director may not become the active and successful opponent of an individual stockholder but must attempt to promote the interests of all stockholders. Pelletier v. Zweifel, 921 F.2d 1465 (11th Cir.), cert. denied, 502 U.S. 855, 112 S. Ct. 167, 116 L. Ed. 2d 130 (1991), cert. denied, 502 U.S. 855, 112 S. Ct. 167, 116 L. Ed. 2d 130 (1991).

- An officer or a director, even an inactive one, owes a fiduciary duty of good faith and due care to the corporation. Super Valu Stores, Inc. v. First Nat'l Bank, 463 F. Supp. 1183 (M.D. Ga. 1979) (decided under former Code 1933, § 22-713).

- The duty is one owed to the corporation which possesses the cause of action for breach of duty. Super Valu Stores, Inc. v. First Nat'l Bank, 463 F. Supp. 1183 (M.D. Ga. 1979).

- In a bankruptcy proceeding, revesting of corporate governance to the directors and officers carries with it a fiduciary obligation to creditors under both state law and the Bankruptcy Code. In re Concrete Prods., Inc., 208 Bankr. 1000 (Bankr. S.D. Ga. 1996).

No evidence established that the board, and, more specifically, the defendants, approved or gave authority to enter into a consulting arrangement; the spouse of the debtor's chief executive officer was hired as the consultant under the agreement to promote sales. There was no evidence to allow the court to deduce that by entering into this arrangement, defendants failed to meet their statutory obligations under O.C.G.A. § 14-2-830 because, in December of 2000, debtor was not insolvent, and the concept of seeking outside assistance to boost sales was certainly consistent with maximizing profits for shareholders; similar evidence problems existed with the allegation that a cruise offered to qualifying employees constituted a breach of fiduciary duty by defendants. Hays v. Curry (In re Maxxis Group), Bankr. (Bankr. N.D. Ga. Sept. 29, 2009).

- Knowledge of the financial condition of the company does not trigger liability for subsequent actions; breaches of good faith and due care are required. There was simply insufficient evidence to impose liability with respect to the issuance of the asset purchase agreements. Hays v. Curry (In re Maxxis Group), Bankr. (Bankr. N.D. Ga. Sept. 29, 2009).

- Court refused to find breach of a corporate director's duty based solely on the absence of a turnaround plan. Such a standard was not supported by Georgia statute or common law; instead, courts deferred to the strategies and judgment of corporate management. Hays v. Curry (In re Maxxis Group), Bankr. (Bankr. N.D. Ga. Sept. 29, 2009).

- Duties of a debtor, as an officer and director of a corporation, as outlined in O.C.G.A. §§ 14-2-830 and14-2-842, did not create any statutory fiduciary duties that, if breached, would provide grounds for non-dischargeability under 11 U.S.C. § 523(a)(4). Omega Cotton Co. v. Sutton (In re Sutton), Bankr. (Bankr. M.D. Ga. Oct. 2, 2008).

United States Bankruptcy Court for the Northern District of Georgia joined other bankruptcy courts in Georgia in concluding that merely being an officer or director of a corporation, without more, did not create a fiduciary relationship for purposes of nondischargeability of a debt, as Georgia statutes did not impose a heightened duty on an officer or director and did not use the term "fiduciary" to describe the duties or in any way speak in terms of a trust. Hot Shot Kids Inc. v. Pervis (In re Pervis), 497 Bankr. 612 (Bankr. N.D. Ga. 2013).

- Good faith is not just a question of what is proper for the corporation. It also requires that the stockholders be treated fairly, that their investments be protected, and that a corporation be managed in a prudent manner for the benefit of all stockholders. Comolli v. Comolli, 241 Ga. 471, 246 S.E.2d 278 (1978) (decided under former Code 1933, § 22-713).

- Board of directors had authority to adopt a shareholders rights plan with a continuing director feature to protect against hostile takeovers without amendment of the articles of incorporation or bylaws. Invacare Corp. v. Healthdyne Technologies, Inc., 968 F. Supp. 1578 (N.D. Ga. 1997).

- Business judgment rule could not be found inapplicable on summary judgment in a suit alleging preferential payments because a corporate director had a statutory right as set forth in O.C.G.A. § 14-2-830 to rely on information obtained from individuals whom the director believed to be reliable and competent. Thus, evidence that the director customarily had deferred to management decisions did not, in itself, show bad faith or a lack of deliberation and diligence. Post-Confirmation Comm. for Small Loans, Inc. v. Martin, F. Supp. 2d (M.D. Ga. June 13, 2016).

- In an action by non-rehired anesthesiologists against other anesthesiologists in their former group that were rehired by a hospital, the non-hired doctors failed to demonstrate a breach of fiduciary duty or fraud on the part of the doctors who were hired; they made a business judgment with advice of counsel and were free to prepare to compete prior to the group's shareholders' decision to terminate the group's contract with the hospital. Sewell v. Cancel, 331 Ga. App. 687, 771 S.E.2d 388 (2015).

- To the extent that trust beneficiaries claimed that trustees, in their roles as corporate officers and directors of entities in which the trusts held shares, reduced the pro rata dividends paid through the entities or had retained earnings, there was no breach of fiduciary duty; but a jury question remained as to whether the trustees' subjecting pro rata distributions to a code of conduct (for which there was no provision in the corporate documents) was in bad faith. Rollins v. Rollins, 338 Ga. App. 308, 790 S.E.2d 157 (2016).

Cited in Boddy v. Theiling, 129 Ga. App. 273, 199 S.E.2d 379 (1973); Hamilton Bank & Trust Co. v. Holliday, 469 F. Supp. 1229 (N.D. Ga. 1979); Horne v. Drachman, 247 Ga. 802, 280 S.E.2d 338 (1981); Quinn v. Cardiovascular Physicians, 254 Ga. 216, 326 S.E.2d 460 (1985); Corporate Jet Aviation, Inc. v. Vantress, 45 Bankr. 629 (Bankr. N.D. Ga. 1985); Parks v. Multimedia Techs., Inc., 239 Ga. App. 282, 520 S.E.2d 517 (1999); Fisher v. State Mut. Ins. Co., 290 F.3d 1256 (11th Cir. 2002).

RESEARCH REFERENCES

Am. Jur. 2d.

- 18B Am. Jur. 2d, Corporations, §§ 1426 et seq., 1431 et seq.

- 19 C.J.S., Corporations, §§ 558 et seq., 575, 576.

- Motive as affecting personal liability of directors in voting for acts not in themselves illegal, 4 A.L.R. 166.

Power of directors to sell property of corporation without consent of stockholders, 5 A.L.R. 930; 60 A.L.R. 1210.

Liability of public corporation for money received by it for unlawfully issued instrument of indebtedness, 7 A.L.R. 353.

Laches as affecting right of corporation or its stockholders to relief against directors for violations of trust, 10 A.L.R. 370.

Personal liability of directors as affected by terms of contract or form of signature, 33 A.L.R. 1353; 51 A.L.R. 319.

Provision of constitution or statute making directors or officers of corporation liable for money embezzled or misappropriated, 46 A.L.R. 1164.

Right of creditor of corporation to maintain personal action against directors or officers for mismanagement, 50 A.L.R. 462.

Personal liability on contract made by "trustees" or others in closing affairs of dissolved corporation, 76 A.L.R. 1478.

Assignability of claim against officers or directors of corporation for breach of duty, 80 A.L.R. 875.

Validity, construction, and effect of clause in obligation of corporation that it is issued without recourse against officers or directors, 97 A.L.R. 1157.

Personal liability of directors to holders of corporate securities because of false statements therein, 99 A.L.R. 852.

Recovery against corporate directors or officers for fraud or mismanagement as affected by releases, ratification, waiver, or consent by some, but not all, of the stockholders, 120 A.L.R. 238.

Construction and application of statutes making corporate officers or directors liable in respect of loans or advances to stockholders or officers, 129 A.L.R. 1258.

Personal liability of corporate directors or officers under statute imposing liability in respect of excessive indebtedness, as affected by payment by the corporation (or its receiver, assignee in insolvency, or trustee in bankruptcy) of all or part of the excessive indebtedness, 130 A.L.R. 824.

Personal liability of corporate directors or officers to third persons for restitution, or for damages for conversion, under circumstances rendering the corporation itself liable, 152 A.L.R. 696.

Accountability of corporate directors or officers for profit from activities beyond the corporate powers, but involving the use of information or opportunities available to them by reason of their position in the corporation, 153 A.L.R. 663.

Criminal liability of corporate officer who issues worthless checks in corporate name, 68 A.L.R.2d 1269.

Duty and liability of closely held corporation, its directors, officers, or majority stockholders, in acquiring stock of minority shareholder, 7 A.L.R.3d 500.

Liability of corporate directors for negligence in permitting mismanagement or defalcations by officers or employees, 25 A.L.R.3d 941.

Liability of corporate directors or officers for negligence in permitting conversion of property of third persons by corporation, 29 A.L.R.3d 660.

Liability of corporate officer or director for commission or compensation received from third person in connection with that person's transaction with corporation, 47 A.L.R.3d 373.

Personal liability of officers or directors of corporation on corporate checks issued against insufficient funds, 47 A.L.R.3d 1250.

Personal civil liability of officer or director of corporation for negligence of subordinate corporate employee causing personal injury or death of third person, 90 A.L.R.3d 916.

Negligence, nonfeasance, or ratification of wrongdoing as excusing demand on directors as prerequisite to bringing of stockholder's derivative suit on behalf of corporation, 99 A.L.R.3d 1034.

Propriety of attorney who has represented corporation acting for corporation in controversy with officer, director, or stockholder, 1 A.L.R.4th 1124.

Financial inability of corporation to take advantage of business opportunity as affecting determination whether "corporate opportunity" was presented, 16 A.L.R.4th 185.

Purchase of shares of corporation by director or officer as usurpation of "corporate opportunity,", 16 A.L.R.4th 784.

Fairness to corporation where "corporate opportunity" is allegedly usurped by officer or director, 17 A.L.R.4th 479.

Duty of corporate directors to exercise "informed" judgment in recommending responses to merger or tender offers, 46 A.L.R.4th 887.

Liability of corporate director, officer, or employee for tortious interference with corporation's contract with another, 72 A.L.R.4th 492.