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Amendment to Ohio General Corporation Law and Limited Liability Company Law Focuses on Officers; Freedom of Contract Principles

David S. Jackson and Alyson J. Letsky
8/3/16

ORC    Ohio Senate Bill 181 went into effect last month, revising the Ohio General Corporation Law and the Limited Liability Companies Act to create and clarify the fiduciary duties of, and expand liability protections to, officers of corporations and limited liability companies, and to reinforce the freedom of contract principles in LLCs. 

    LLC Officer Duties and Limitation of Liability:  Under the Ohio Limited Liability Companies Act, new Ohio Revised Code 1705.292 sets forth the duties of an officer, dependent on whether the officer is also a member.  Officers who are not members have the same duties and limitation of liability protections as managers who are not members or who are members under limited circumstances.  Specifically, these officers now are afforded a presumption of non-liability with respect to breach of their fiduciary duties under the business judgment rule, which presumption can only be rebutted by clear and convincing evidence, and are not liable in money damages for violations of their fiduciary duties except if evidence of intentional or reckless misconduct toward the company is proved by clear and convincing evidence.  Moreover, officers now are provided the same limited liability afforded to members and managers of LLCs. 

    Structuring Fiduciary Duties (LLC):  In addition to creating fiduciary duties and specifying the standard for determining whether an officer is liable for violating such duties and liable for money damages, the new law gives an Ohio LLC significant flexibility in structuring the fiduciary duties of its officers, members and managers.  For instance, the members or managers (as applicable) of an LLC can establish additional fiduciary duties of an officer in a written operating agreement or another agreement with the officer; a written agreement, including an operating agreement, can modify, waive or eliminate the duty of loyalty and/or duty of care for one or more members, managers or officers; and the articles of organization or operating agreement can eliminate the standard for determining an officer’s liability in money damages for a violation of his or her fiduciary duties.  However, there are still some limitations on the actions that an operating agreement may perform.  

    Officers of Corporations:  Similar to officers of LLCs, officers of corporations were (prior to the enactment of S.B. 181) potentially exposed to greater potential liability, as they never were presented the same limitation of liability protections afforded to directors.  Ohio Revised Code 1701.641 now prescribes the fiduciary duties of a corporate officer and specifies the standard for determining whether an officer is liable for violating his or her fiduciary duties.  Officers of corporations now are given the same business judgment rule protection and limitations on liability offered to directors under prior law. 

    Structuring Fiduciary Duties (Corporation):  Like LLC operating agreements, the articles of incorporation of a corporation, the code of regulations or any written agreement with an officer can establish additional fiduciary duties of an officer.  The articles of incorporation or code of regulations also can eliminate the standard of an officer’s liability in money damages for his or her violation of an officer’s fiduciary duties. 

    Given the increased flexibility presented to limited liability companies and corporations and the greater protections allowed to officers, these statutory changes should enhance the ability of Ohio corporations and limited liability companies to recruit highly talented officers and Ohio’s continued development as an attractive place to do business.

    Should you have any questions regarding the changes to the law, please contact Alyson J. Letsky.

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    Disclaimer:  The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.

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