Business Associations - Paul A. Quiros, Lynn S. Scott, William B. Shearer Iii, and William S. Smoak Jr.

• Jurisdiction: Georgia,United States,Federal
• Publication year: 2008
• Citation: Vol. 60 No. 1

Business Associationsby Paul A. Quiros^*

Lynn S. Scott^**

William B. Shearer III^*** and William S. Smoak Jr.^****

Introduction

This Article surveys noteworthy cases in the areas of corporate, limited liability company, partnership, agency, and joint venture law decided between June 1, 2007 and May 31, 2008 by the Georgia Supreme court, the Georgia court ofAppeals, the united States court ofAppeals for the Eleventh circuit, and the united States district courts located in Georgia. In addition, this Article provides an overview of enactments at the 2008 Session of the Georgia General Assembly to the official code of Georgia Annotated (O.C.G.A.) with respect to banking, finance, commerce, corporation, partnership, and business associations statutes.

I. Corporations

A. Fiduciary Duties

1. Newly Recognized Action for Aiding and Abetting Breach of Fiduciary Duty Interpreted, Its Logic Expanded to Other Tortious Conduct. In In re Friedman's, Inc.,¹ the United States Bankruptcy Court for the Southern District of Georgia applied and expounded upon Georgia's recent recognition in Insight Technology, Inc. v. Freightcheck, LLC² of a cause of action for aiding and abetting a breach of fiduciary duty.³ Among other claims related to the insolvency of a prominent jewelry store chain, the trustee of the creditors' committee (the Trustee) claimed that the company's financial advisor and its controlling shareholder (collectively, the Defendants) aided and abetted fraud upon Friedman's, Inc. (Friedman's) by making false and misleading statements. The Trustee claimed the statements were made to induce Friedman's directors to approve a self-interested restructuring transaction that favored an affiliate of the controlling shareholder. The Defendants also allegedly caused Friedman's to pay incorrect invoices for services performed by the financial advisor and purportedly facilitated the payment of bonus compensation based upon false financial state-ments.⁴

The district court held that although no Georgia court previously had recognized a claim for aiding and abetting fraud, the implicit logic of the decision in Insight Technology meant that such a cause of action was cognizable under Georgia law.⁵ While the district court reasoned that it was "no great step" to conclude that pursuant to Insight Technology, aiding and abetting fraud constitutes an "'actionable wrong within the language of O.C.G.A. Sec. 51-12-30,"⁶ the Trustee's complaint included only conclusory allegations bereft of factual support.⁷ Consequently, the Trustee s claims against the Defendants for aiding and abetting fraud were dismissed.⁸

The Trustee also claimed that the Defendants aided and abetted breaches of fiduciary duty committed by several Friedman's officer-directors by facilitating forgivable loans to the officer-directors from a Friedman s affiliated entity in exchange for the officer-directors support of the self-interested restructuring transaction.⁹ Examining these allegations, the district court held that it was fair to assume the controlling shareholder knowingly procured a breach of fiduciary duty by the officer-directors under the standards set forth in Insight Technology.¹⁰ The court determined that the controlling shareholder appointed the officer-directors and thus knew of their fiduciary obligations to Friedman s.¹¹ Regarding the forgivable loan claim, the Trustee s complaint sufficiently alleged that the controlling shareholder acted with malice towards Friedman s by facilitating the forgivable loans to the officer-directors from the Friedman s affiliate, which induced those individuals to support the self-dealing restructuring.¹²

Friedman's is noteworthy because it not only signals a willingness by courts interpreting Georgia law to apply new theories of recovery to rectify corporate malfeasance, but it also demonstrates that the logical underpinnings of such theories may be extrapolated into other areas of Georgia jurisprudence. Undoubtedly, in the coming years Georgia courts will continue to hone and define the factual circumstances under which a claim for aiding and abetting a breach of fiduciary duty may be brought pursuant to the framework articulated in Insight Technology.

2. Reliance on Accounting Experts by CFO Insufficient to Invoke Protections of the Business Judgment Rule. In TSG

Water Resources, Inc. v. D'Alba & Donovan Certified Public Accountants, P.C.,¹³ the United States Court of Appeals for the Eleventh Circuit examined the extent under Georgia law to which a corporate officer s reliance on the expert advice of an accounting firm served to insulate that officer from liability under the business judgment rule.¹⁴ TSG Water Resources, Inc. (TSG) alleged that its former chief financial officer (the CFO) oversaw a number of accounting errors that were not disclosed to TSG s board ofdirectors and that resulted in a material overstatement of the company's finances for its 2000 fiscal year. The plaintiff claimed (1) that the CFO knew of these errors prior to an important meeting in which board members and other investors decided to inject an additional $1,450,000 of equity into TSG, (2) that the decision to inject the new capital was based in large part on the favorable projections in the misstated financial information, and (3) that notwithstanding the CFO's knowledge of the misstatements, he remained silent throughout this meeting.¹⁵

Noting the absence in the record of any evidence of self-dealing by the CFO, the district court entered summary judgment in his favor. Relying on the business judgment rule, the district court held that the CFO's discretionary decision to rely upon the financial information prepared by an outside accounting firm was sufficient to show that the CFO had acted in an informed and deliberate manner in discharging his fiduciary obligations to TSG.¹⁶ The court of appeals reversed, observing that the protections of the business judgment rule are unavailable to an officer engaged in fraud, bad faith, or an abuse of discretion.¹⁷ While consultation with outside experts "'weigh[ed] in favor of finding that [a corporate fiduciary] did not abuse [its] discretion,'" reliance on the experts alone was not dispositive on the CFO's liability.¹⁸

In the view of the court of appeals, the CFO's silence at the crucial board meeting coupled with his alleged knowledge that the erroneous financial information was used specifically to facilitate the board's decision to seek additional capital were sufficient to demonstrate the existence of a genuine issue of material fact regarding whether the CFO abused his discretion or acted in bad faith.¹⁹ The decision in TSG illustrates the often overlooked legal principle that expert advice is not a panacea for an officer or director in the face of a fiduciary duty lawsuit, especially when evidence exists that the officer or director knew of facts tending to undermine the foundational premises of the advice.

B. Board of Directors Entitled to Final and Conclusive Decision-Making Authority Under Stock Option Plan If Decisions Are Made in Good Faith

In Planning Technologies, Inc. v. Korman,²⁰ the Georgia Court of Appeals examined an issue of first impression in Georgia—the scope of a board of directors' discretionary authority to make factual determina- tions under broadly drafted provisions of a corporate stock option plan.²¹ Planning Technologies, Inc.'s (PTI) 1998 Stock Option Plan (the Plan) provided its board with "full power to . . . construe and interpret the Plan and any agreement or instrument entered into under the Plan."²² Moreover, the board's decisions were to be "final, conclusive, and binding" on PTI and any Plan participants.²³

The plaintiff s option award agreement (the Agreement) included a vesting acceleration clause whereby all of his outstanding options would become fully exercisable upon a "change in control," which the Plan defined as a "reorganization, merger, consolidation . . . sale or disposition of all or substantially all of the assets of [PTI] or similar corporate transaction."²⁴ Additionally, the Agreement stated that any dispute relating to its construction or interpretation would be determined by the board, and this determination would be "final, binding and conclusive on [the plaintiff] and [PTI] for all purposes."²⁵

On March 31, 2000, PTI issued a sizeable amount of common stock to an investor in exchange for cash and other assets (the Transaction). Both prior to and following the closing, PTI's board determined that the Transaction did not constitute a change in control for purposes of the Plan and the Agreement. As such, PTI refused to issue shares to the plaintiff when he attempted to exercise his options shortly following the Transaction.²⁶

The trial court ruled that the Transaction was a "change in control" that accelerated the vesting ofthe plaintiff s options and entered partial summary judgment in his favor.²⁷ The court of appeals disagreed, holding that the unambiguous language of the Agreement and the Plan clearly granted the PTI board expansive decision-making authority over all factual determinations under those contracts—including whether the transaction represented a "change in control."²⁸

More notably, the court of appeals in Korman specifically rejected PTI's contention that the terms of the Plan and the Agreement granted unfettered power to the board.²⁹ Following precedent in other jurisdictions, the court held that even if a corporate stock option plan or option agreement provides that a board of directors has final and conclusive decision-making authority, it still must exercise "good faith and honest judgment."³⁰

Although the court of appeals did not specifically address what actions by the PTI board would satisfy this deferential yet fact-specific standard, it did offer guidance to lead the trial court's inquiry on remand.³¹ In the view of the court in Korman, a board's decision that displays a "total absence of any factual...