TwitterLinkedInShare

Tennessee Directors Benefit from Recent TBCA Change, Contrary to Observers: Recent Amendment to the Tennessee Business Corporation Act Is Not the Sea Change Some Fear for Director Liability

06.03.15


Much has been made of a recent amendment to the Tennessee Business Corporation Act and its impact on the financial liability of corporate directors. Newly added Section 48-24-109 of the Tennessee Code Annotated provides that, in the event a corporation is dissolved, “[d]irectors shall cause a dissolved corporation to discharge or make reasonable provision for the payment of claims and make distributions of assets to shareholders after payment or provision for claims.” Is this a significant change in Tennessee law? A closer look at the amendment suggests this is much ado about nothing, and it may actually provide directors with greater protection from financial liability.

Section 48-24-109 is based on Section 14.09 of the Model Business Corporation Act (“MBCA”). The MBCA is a model statute prepared by the American Bar Association upon which many states rely when enacting or amending their business corporation statutes. In fact, Section 14.09 of the MBCA already has been adopted in a number of other states.

The Official Comment to Section 14.09 of the MBCA makes clear that this section changes very little. The “new” duty is not new at all: an earlier version of the MBCA implied the duty from other sections. In other words, this section merely enumerates duties that already existed for corporate directors. As the Official Comment to Section 14.09 of the MBCA notes, although “various theories” recognize direct liability to creditors, the basic approach has not changed and “claims against directors for breach of [the newly added section] . . . should be mediated through the corporation.”

Moreover, the amendment also contains a new insulation from liability, providing that “[d]irectors of a dissolved corporation that has disposed of claims under § 48-24-106 or § 48-24-107 shall not be liable for breach of subsection (a) with respect to claims against the dissolved corporation that are barred or satisfied under § 48-24-106 or § 48-24-107.” Sections 49-24-106 and 107 have not changed and contain familiar requirements, such as publishing the dissolution notice in a newspaper of general circulation. In that sense, this amendment actually provides a clearer basis for directors to insulate themselves from liability.

Finally, a director concerned with his or her potential liability need not look as far as the MBCA and its adopting states to find an analogous statute to allay those concerns. Last year, a nearly identical section was added to the Tennessee Nonprofit Corporation Act to little fanfare. See Tenn. Code Ann. § 48-64-110.

We understand that some directors, investors and entrepreneurs may be more comfortable with Delaware corporate law and would prefer for the corporations that they own and serve to incorporate in Delaware. This amendment to the Tennessee Business Corporation Act, however, should not cause current directors of Tennessee corporations to resign from their positions, nor should the amendment prompt corporations incorporated in Tennessee to re-incorporate in Delaware.

Waller also obtained the following comment from Senator Jack Johnson, sponsor of the amendment in the Tennessee Senate:

Recently, confusion has surrounded the effects of Public Chapter 60 which implemented a number of changes to the Tennessee Business Corporation Act. It has been implied that the changes in this law represent a drastic departure in liability protection afforded to directors of Tennessee corporations by making them personally liable for the debts of the corporation. This was neither the legislative intent nor, in my opinion, the effect of this change. I am thankful for the numerous attorneys from across the state who worked on the language of the bill. The intent of this legislation is to clarify current law, provide further protections to corporate directors, and make Tennessee a competitive state in which corporations will choose to form and hopefully will choose to locate.

For additional information, please contact Tyson Bickley, Don Moody, Hunter Rost, Jacob Weinstein or any member of the Waller Corporate practice at 800-487-6380.
 



The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.