The Business Judgment Rule — A Corporate Officer’s Best Friend

Posted by William J. Piercy on

The business judgment rule is a policy of judicial restraint born of the recognition that corporate officers and managers are generally more qualified to make business decisions than are judges and juries. While the business judgment rule has long been accepted in many states, until recently, it did not get much attention in Georgia. In Brock Built, LLC v. Blake, the Georgia Court of Appeals recently recognized the applicability of the doctrine to the management of limited liability companies.

Henry Blake was employed as the president of Brock Built, a residential construction firm. Blake’s employment agreement afforded him a base salary as well as incentive compensation amounting to a certain percentage of Brock Built’s “profit margin.” Blake’s employment agreement further provided that if he was terminated without “cause”, he would be entitled to a full year’s severance. However, if he resigned or was terminated for cause, he would get nothing.

In the midst of the contract term, Blake’s employment was terminated. Brock Built claimed that it fired Blake for cause or, alternatively, that he resigned, and that no severance was due. For his part, Blake said that he was fired without cause and that he was entitled to a year of severance pay.

Blake filed suit against Brock Built for breach of contract, among other claims. In response, Brock Built asserted counterclaims alleging that Blake breached his fiduciary duties to the company by: (A) attempting to maximize Brock Built’s profit, with the improper motive of increasing his incentive compensation, by accelerating the construction of houses that were not scheduled to close until the following year and by delaying the payment of invoices and other employees bonuses; and (B) failing to adequately manage the purchase order system, failing to budget engineering features into the sales price of certain homes, and failing to use proper building materials for noise abatement in other specific homes.

The Court ruled in Blake’s favor. In summarily dismissing Brock Built’s counterclaim for breach of fiduciary duty, the Court held that the business judgment rule protects corporate officers and managers from liability when they make good faith business decisions in an informed and deliberate manner. The presumption is that corporate officers have acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Unless this presumption is rebutted, corporate officers cannot be held personally liable for their managerial decisions. Corporate officers may be still held liable where they engage in fraud, bad faith, or abuse of discretion. However, unless the alleged conduct rises to the level of fraud or bad faith, Georgia Courts will generally defer to the corporate officers when it comes to business decisions.

Applying this standard to the facts of the case, the Court basically found that Brock Built’s allegations against Blake were not nefarious or egregious enough to give rise to his liability. Allegations amounting to mere negligence, carelessness or lackadaisical performance do not amount to a breach of fiduciary duty.

What can we learn from this? The business judgment rule is a powerful shield available to corporate officers charged with breaching their fiduciary duties. In the absence of fraud or similar conduct, Georgia Courts generally will not second guess the well- intentioned business decisions of corporate management.