Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.
One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.
The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.
A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.
Both Ohio corporations and Ohio LLCs are permitted (but not required) to enter into indemnity agreements with their officers, directors, managers and employees. But when forming an Ohio corporation or Ohio LLC, entities should carefully consider the differing mandatory indemnity obligations that also apply to each type of organization.
As we noted in a previous post, the Ohio Supreme Court recently stated in Miller v. Miller that even without an indemnity agreement, Ohio corporations have certain mandatory responsibilities to pay directors’ litigation expenses (provided that a director first submits an "undertaking" to the corporation) under Ohio Revised Code §1701.13(E)(5)(a).
Mandatory indemnity requirements for Ohio LLCs are quite different. Ohio Revised Code §1705.32(C) states that to the extent that a "manager, officer, employee or agent" of a limited liability company has been successful on the merits or otherwise in defense of any action, suit or proceeding related to their status as a manager, officer, employee or agent, such person "shall" be indemnified against expenses that were actually and reasonably incurred.
This statute does not allow an Ohio LLC to avoid the indemnity by making a statement in its articles of organization or operating agreement. The LLC statute also applies to managers, officers, employees and agents – the Ohio corporate statute described above applies only to directors. In those regards, an Ohio LLC’s mandatory indemnity requirements may seem more burdensome (from the LLC’s perspective) than the indemnity requirements applicable to an Ohio corporation.
The circumstances in which an Ohio LLC would have to pay litigation expenses …
Ohio corporations should carefully consider whether their articles of incorporation or code of regulations should state that Ohio Revised Code §1701.13(E)(5)(a) does not apply to the corporation. Without making that exclusion, the lack of an indemnity agreement will not prevent a director from exercising his statutory right to receive (from the corporation) payment of his litigation expenses.
Corporations and their directors often enter into indemnity agreements. These agreements usually state that the company will reimburse the director for certain expenses (such as legal fees) incurred by the director as a result of his or her status as a director. But Miller v. Miller, a recent decision by the Ohio Supreme Court, makes clear that even without an indemnity agreement, Ohio corporations have (unless otherwise stated in their articles of incorporation or code of regulations) certain mandatory responsibilities to pay directors’ litigation expenses.
Ohio Revised Code §1701.13(E)(5)(a) states that Ohio corporations "shall" pay the expenses (when they are incurred) of directors who are subject to "actions, suits, or proceedings" asserted against a director because he is a director. The only step a director must take to receive such advances is to execute an "undertaking," which must state that the director will: (i) reasonably cooperate with the corporation concerning the action, suit or proceeding, and (ii) repay all expense to the corporation if it is proven in court by clear and convincing evidence that the director’s action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest …