Law, Legal Insights |

It is relatively common for shareholders or a board of directors to have a right to veto over important decisions.  This is especially true for small, closely held corporations.  However, the Eleventh Circuit Court of Appeals’ recent decision in Fed. Deposit Ins. Corp. v. Loudermilk, 16-17315, should serve as a warning to Georgia businesses. Choosing not to exercise veto rights may make one shareholder or director liable for the negligence of another.

BACKGROUND

Seven investors formed Buckhead Community Bank (“BCB”) and wanted the bank to become a “billion dollar bank.”  BCB’s directors initiated an aggressive growth strategy by expanding BCB’s loan portfolio through the approval of risky loans.  Many of these loans failed.  In 2009 – at the height of the bank closure crisis – the FDIC was appointed as BCB’s receiver.  

The FDIC sued several of BCB’s former directors. The FDIC alleged that the directors were negligent in approving 10 risky commercial real estate loans. Eventually, the case went to trial. The jury returned a verdict in favor of the FDIC on 4 of the 10 loans.  Furthermore, the jury held the directors jointly and severally liable for the damages.  The directors appealed.  On July 22, 2019, the Eleventh Circuit Court of Appeals affirmed a $5 million judgment against the directors.

RIGHT TO VETO

According to BCB’s policies, the Directors’ Loan Committee had to approve all loans above a certain amount. The Committee did so at weekly meetings.  A quorum of three voting members could approve a loan. However, any one member of the Committee could veto a loan even if he did not attend the meeting.  If a member wanted to kill a loan, he had 2 options: 1) he could veto the loan before it was discussed at a meeting, or 2) attend the meeting and cast his “no” vote there.  If a member neither objected before the meeting nor attended the meeting and voted against a loan, he effectively voted to approve it.  Even if he did not attend the approval meeting and cast a “yes” vote on the record, the member still approved the loan by not using his veto power at any point during the approval process.

Because each member of the Directors’ Loan Committee had an absolute right to veto, the appellate court opined that every time a member failed to use that veto power, he implicitly stamped his approval on the loan and allowed it to move through the process.

APPORTIONMENT

The majority of the appellate court’s opinion discusses Georgia’s apportionment statute and the common law principle that liability will be imposed jointly and severally on the tortfeasors who act in concert.  

Georgia’s apportionment statute requires a trier of fact – i.e., the jury or the judge in a bench trial – to “apportion its award of damages among the persons who are liable according to the percentage of fault of each person.”  

The court noted that the case was “infected with a conflict of interest from the moment the directors decided before trial to pursue an apportionment theory of liability.” But, instead of each director pointing his finger at the other directors to downplay his own fault, they offered no evidence or argument as to the relative liability of the individual directors.

Since each individual director had a veto right (which they failed to exercise), each member of the Directors’ Loan Committee was acting in concert on every loan.  Therefore, it is impossible to divide fault because the decision to approve each loan “was a group decision.”  

TAKEAWAY

It is too early to tell how narrow or broad Georgia courts will apply these principles.  The courts may limit its application only to bank directors and officers.  Or, courts may broadly apply these principles to any shareholder, director, or officer who retains a right to veto important decisions, including those in closely held corporations and limited liability companies. 

Shareholders, directors, and officers should review their agreements and policies to determine whether they contain veto rights.  If an individual retains veto rights and does not support a proposed action, he or she should exercise those veto rights or attend the meeting, cast a “no” vote there, and insure that all votes are documented.  Any person forming a business in Georgia should consider the benefits and risks of giving the shareholders or directors a right to veto.  

Michael B. Pugh
Thompson, O’Brien, Kemp & Nasuti, P.C.
40 Technology Parkway S., Suite 300
Peachtree Corners, GA 30092
(O) 770-925-0111 | (F) 770-925-8597
mpugh@tokn.com | www.tokn.com
www.linkedin.com/in/michaelbpugh

Michael Pugh is an experienced associate with TOKN’s Bankruptcy, Business Law, and Litigation teams. To learn more about Michael, please visit his profile here. To contact Michael, please see his email above.