Business Associations - Paul A. Quiros, Lynn S. Scott, William B. Shearer Iii, and J. Haskell Murray

• Publication year: 2007

Business Associationsby Paul A. Quiros^* Lynn S. Scott^** William B. Shearer III^*** and J. Haskell Murray^****

Introduction

This Article surveys noteworthy cases in the areas of corporate, limited liability company, partnership, agency, and joint venture law decided during the survey period¹ by the Georgia Supreme Court, the Georgia court of Appeals, the united States court of Appeals for the Eleventh Circuit, and the United States district courts located in Georgia.² This Article also summarizes enactments at the 2007 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 associations laws.³

I. Corporations

A. Fiduciary Duties

1. The Georgia Business Corporation Code and the Business Judgment Rule Protect Officers and Directors Against Claims of Ordinary Negligence. In a case of first impression, the Georgia Court of Appeals, in Flexible Products Co. v. Ervast,⁴ held that the business judgment rule and sections of the Georgia Business Corporation Code⁵ protect officers and directors of Georgia corporations against liability for ordinary negligence as a matter of law.⁶ In this case, Roger Ervast sued his former employer, Flexible Products Co. ("FPC"), and two of its officers for breach of fiduciary duty for failing to inform him of FPC's merger discussions with Dow Chemical Company ("Dow") before Ervast sold his FPC stock back to the company.⁷

In September 1999 Dow contacted and met with FPC executives to discuss acquiring FPC.⁸ In early October 1999, Dow and FPC entered a confidentiality agreement, and on October 26, 1999, Dow "telephonical-ly offered a price that [FPC] was willing to consider."⁹ FPC set October 26, 1999 as the date on which negotiations became "material"¹⁰ and "paid all shareholders who sold their shares after that date the higher merger price per share."¹¹ Ervast had sold his FPC shares on october 4, 1999 and October 11, 1999, and therefore received the lower pre-merger price.¹² Arguing that FPC should have informed him of the merger discussions before he sold his shares, Ervast sued FPC and sought "the difference between his stock's pre- and post-merger values" and attorney fees.¹³

At trial, the jury found that FPC and its officers had breached their fiduciary duties to Ervast and awarded Ervast $2,729,691 in damages.¹⁴ The Georgia Court of Appeals reversed, holding that the trial court should have granted FPC's motion for directed verdict on Ervast's claim of ordinary negligence because "Georgia's business judgment rule relieves officers and directors from liability for acts or omissions taken in good faith compliance with their corporate duties."¹⁵ The case of Flexible Products Co., while only providing a very brief discussion on the issue of standard of care, is still noteworthy because it is the first case to hold that officers and directors of Georgia corporations will be protected against claims of ordinary negligence in the performance of their duties on behalf of their respective corporations.¹⁶ Without expressly holding as such, by protecting Georgia officers and directors against liability for ordinary negligence, the court of appeals has effectively adopted a gross negligence standard of care, similar to the standard of care recognized by Delaware courts for over twenty years.¹⁷

2. Georgia Courts Recognize a Claim for Aiding and Abetting a Breach of Fiduciary Duty. In Insight Technology, Inc. v. Freight-Check LLC,¹⁸ the court of appeals reversed the decision of the trial court and held that while Georgia courts had never recognized a claim for aiding and abetting a breach of fiduciary duty in the past, Insight Technology, Inc. ("Insight") could maintain such a claim under O.C.G.A. section 51-12-30,¹⁹ which covers the inducement of actions as joint wrongdoers.²⁰ Insight brought multiple claims against (1) Darren Brewer, Insight's former president, (2) GetLoaded.com, LLC ("GetLoad-ed"), an Insight competitor, (3) Patrick Hull, the majority shareholder of GetLoaded, and (4) FreightCheck, LLC, a company created by Brewer and Hull (collectively, the "Defendants").²¹ Insight alleged that Brewer and Hull used Insight's software, pricing, website design, and other business information in forming FreightCheck while Brewer was still employed by Insight. The trial court granted the Defendants' motion for summary judgment on the claim that Hull, GetLoaded, and Freight-Check aided and abetted Brewer in his alleged breach of fiduciary duty. In granting the motion, the trial court stated that Georgia courts have never recognized such a claim.²²

The court of appeals reversed the decision of the trial court.²³ Citing Rome Industries, Inc. v. Jonsson,²⁴ the court in Insight discussed how Georgia courts have held a defendant liable for assisting in a breach of fiduciary duty under O.C.G.A. section 51-12-30 and tortious interference with contractual rights.²⁵ The court in Rome Industries stated that "[t]he fiduciary relationship between a corporation and its officer arises out of the contractual or employment relationship between the two parties" and, thus, aiding in a breach of fiduciary duty is tantamount to tortious interference with contractual rights.²⁶ The court in Insight noted that "there is 'no magic in mere nomenclature.'"²⁷ The court held that "'aiding and abetting a breach of fiduciary duty,' 'procuring a breach of fiduciary duty,' or 'tortious interference with a fiduciary relationship'" are all different names for a viable claim under Georgia law and may entitle a plaintiff to recovery upon proof that:

(1) through improper action or wrongful conduct and without privilege, the defendant acted to procure a breach of the primary wrongdoer's fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a fiduciary duty, the defendant acted purposely and with malice and the intent to injure; (3) the defendant's wrongful conduct procured a breach of the primary wrongdoer's fiduciary duty; and (4) the defendant's tortious conduct proximately caused damage to the plaintiff.²⁸

The significance of Insight is even more noteworthy in light of the fact that two federal courts, interpreting Georgia law, dismissed claims based on theories of aiding and abetting a breach of fiduciary duty just a few months prior to this decision.²⁹

3. The Fine Line Between Active Solicitation of Customers and Mere Preparation for Competition Determines Breach of Fiduciary Duty. The United States District Court for the Northern District of Georgia, in Impreglon, Inc. v. Newco Enterprises, Inc.,³⁰ added color to the line between an officer's mere preparation for competition, which is not a breach of fiduciary duty under Georgia law, and an officer's active solicitation of customers, which is a breach.³¹ Newco Enterprises, Inc. ("NEI") outsourced its surface coating of metal and other materials to Impreglon, Inc.³² Curt Jarrell, while serving as Impreglon's CEO, entered into negotiations with NEI regarding numerous topics, including employment, potential lease options, and the formation of a new company to compete with Impreglon.³³ The court held that even though there had been extensive negotiations between Jarrell and NEI, the discussions did not result in a breach of fiduciary duty.³⁴ Moreover, the court noted that under Georgia law, an officer could even purchase a competing business while employed by a rival company without breaching his or her fiduciary duties.³⁵

However, the court granted Impreglon's summary judgment motion on its breach of fiduciary duty claim against Jarrell based on one additional significant factor—his active solicitation of Impreglon's customers and his receipt of specific, written assurances that NEI, and not Impreglon, would receive future business from those customers.³⁶ The district court in Impreglon reiterated the core concern in fiduciary duty analysis: that a corporate officer such as Jarrell may not appropriate "the business opportunities of the corporation."³⁷ While the court did not provide much additional color in this case on what, outside of solicitation of customers, would rise to the level of impermissible appropriation of business opportunities, the court stated that "brief, nonspecific, and strictly hypothetical" inquiries into whether a customer would place orders with an officer if he or she left his or her employer, would not rise to the level of a breach of fiduciary duty.³⁸

B. Strict Scrutiny Applied to an Employment Agreement Signed Separately from (but Concurrently with) a Sale of Business Agreement

The Georgia Court of Appeals, in Hilb, Rogal & Hamilton Co. of Atlanta v. Holley,³⁹ held that (1) strict scrutiny review should be applied to restrictive covenant language in an employment agreement that differed from a sale of business agreement executed by the parties on the same day; (2) under strict scrutiny review, a restriction against " 'accepting an entreaty' from known or prospective customers is overly broad and unenforceable"; (3) Georgia law does not recognize the blue pencil doctrine when dealing with restrictive covenants in employment contracts; and (4) because of the lack of availability of the blue pencil doctrine, the court may not amend the restrictive covenants in the employment agreement, and therefore, the agreement is unenforce-able.⁴⁰ Under Georgia law, courts analyze restrictive covenants under three levels of scrutiny: (1) strict scrutiny for employment contracts, (2) a lesser, middle scrutiny for professional partnership agreements, and (3) a much lower scrutiny for sale of business agreements.⁴¹

In Hilb Hugh Holley signed an Agreement of Merger and a separate employment contract with Hilb, Rogal & Hamilton Company of Atlanta ("HRH") pursuant to the sale of Holley's insurance agency to HRH.⁴² The court refused to analyze Holley's employment contract under the much lower standard...