News & Events

Business Judgment Rule Receives Boost in Tennessee

Tennessee has long recognized the existence of the “business judgment rule” as it relates to claims against corporate directors and managers. There are, however, few cases in which the business judgment rule has been successfully used to obtain a defense summary judgment on behalf of corporate officers and directors. In fact, a search of Tennessee case law shows that most reported decisions on the business judgment rule end up deciding, for various reasons, that the business judgment rule does not apply to the facts presented. Thus, it was pleasantly surprising when the Tennessee Court of Appeals handed down its decision in Kovacs-Whaley v. Wellness Solutions, Inc., 2012 WL 9277777, *9 (Tenn. Ct. App., March 16, 2012).

In Kovacs-Whaley, the plaintiff was employed by a company as an officer and director. Plaintiff was terminated and had her stock repurchased by the company pursuant to a call option exercised by the company. Plaintiff sued the company and two officers and directors. As to the individual defendants, plaintiff alleged that they breached their fiduciary duties to the corporation related to their role in the decision to terminate plaintiff and forced repurchase of her shares. Citing the business judgment rule, the Court of Appeals affirmed summary judgment for defendants on the breach of fiduciary duty claim.

Not only is this decision pleasantly surprising in its use of the business judgment rule, it is also a step forward in summary judgment jurisprudence in Tennessee. Those who follow Tennessee law know that there is a significant split over the appropriate summary judgment standard. Unlike the federal summary judgment standard, the Tennessee standard currently requires parties to affirmatively negate an element of the opposing party’s case in order to get summary judgment. The Court of Appeals found that the business judgment rule affirmatively negated plaintiff’s breach of fiduciary duty claim. This surprising decision is great for corporate officers and directors in Tennessee.

Daniel W. Van Horn