Corporate Directors [and Officers] Making Business Judgments in Tennessee: The Business Judgment Rule

I. Introduction 458II. The Fiduciary Duties of Care and Loyalty 461A. The Duty of Care 462B. The Duty of Loyalty 464III. The Business Judgment Rule 465A. Delaware Law 466B. Tennessee Law 469C. Policy Rationales for Deference to Directors 4701. Encouraging Directors to Serve and Take Risks.........4702. Avoiding Judicial Encroachment into Business Decisions 4723. Preserving the Board's Governance Role 473IV. Current State of the Law 475A. Delaware 475B. Other Jurisdictional Approaches 477C. Tennessee 481V. Tennessee Should Not Apply the Rule to Officers.....485VI. Proposal for Tennessee 491A. Common Law 492B. Statutory 495VII. Conclusion 496I. IntroductionIn 2008, the United States suffered a catastrophic financial crisis. One of the most significant causes of the crisis was that, despite many red flags, the officers of several financial firms decided to take immense risks.9 The officers and directors responsible for the decisions that led to the financial meltdown will probably not suffer any personal liability. When sued, those officers and directors will likely invoke the generous protections of the business judgment rule.10 But even if those parties do not invoke the business judgment rule in defense, the prominent roles directors and officers played in these events still underscore the need for a clear definition of the legal standards governing liability of nondirector officers for misconduct. Despite the obvious importance of officers in the corporate structure, the standard of liability for non-director officers and officers acting solely within their role as officers* 11 remains relatively unexplored in the case law.12In contrast, courts and commentators have reached nearconsensus on the policy justifications for deferential judicial treatment of directors under the business judgment rule.13 Courts traditionally apply a standard of review to determine whether directors are liable for decisions that adversely affect their corporations and harm shareholders-the business judgment rule. Indeed, the business judgment rule is a cornerstone doctrine of state corporate law.1 The business judgment rule prevents courts from reviewing the decisions of corporate directors as long as the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.15 Generally, informed-director decisions made in good faith have been, and should continue to be, protected by the business judgment rule because of sound public policy justifications.16 On the other hand, the body of case law specifically addressing the applicability of the rule to the conduct of non-director officers, or to director-officers acting solely in their officer capacity in the matters at issue, is surprisingly sparse. Moreover, those few cases addressing the issue are conflicting and inconclusive. …