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Role and Duties of Director in Corporations and Closely Held Corporations

Role of Directors

            The role of a director in a corporation is that of a manager of the corporation. See Tenn. Code Ann. § 48-18-101. Subject to the provisions of the charter and/or bylaws, directors of a corporation have the sole authority to exercise the corporate powers and to manage the business affairs of a corporation. Lewis on Behalf of Citizens Sav. Bank & Trust, Co. v. Boyd, 838 S.W.2d 215, 220 (Tenn. Ct. App. 1992) (citations omitted). In executing these responsibilities, directors owe the corporation and its shareholders the fiduciary duties of care and loyalty. Keller v. Estate of McRedmond, 495 S.W.852, 880 (Tenn. 2016) (citing Sanford v. Waugh & Co., 328 S.W.3d 836, 843-44 (Tenn. 2010); Neese v. Brown, 405 S.W.2d 577, 584 (Ten. 1964); Summers v. Cherokee Children & Family Servs., Inc., 112 S.W.3d 486, 503 (Tenn. Ct. App. 2002) (citing Knox—Tenn Rental Co. v. Jenkins Ins., Inc., 755 S.W.2d33, 36 (Tenn. 1988); Hayes v. Schweikart’s Upholstering Co., 402 S.W.2d 472, 483 (Tenn. 1965)) (“Directors and officers of corporations are bound to the exercise of the utmost good faith, loyalty, and honesty toward the corporation.”); Hall v. Tenn. Dressed Beef Co., No. 01-A-01-9510-CH-00430, 1996 WL 355074, at *6-7 (Tenn. Ct. App. June 28, 1996) (corporate directors owe to the corporation “the duty of loyalty and the duty of care”) (citations omitted). A fiduciary is a person that holds the interests of the corporation like that of a trustee, who has the requirement to act primarily for the benefit of others, the shareholders. See McRedmond v. Estate of Marianelli, 46 S.W.3d 730, 738 (Tenn. Ct. App. 2000).

Duty of Care

The duty of care requires that directors act in good faith, and in the best interest of the corporation with “the care an ordinarily prudent person in a like position would exercise under similar circumstances. Hall 1996 WL 355074, at *6 (quoting Tenn. Code Ann. § 48-18-301) (citing Neese, 405 S.W.2d at 580-81). The duty of care is normally implicated in cases that allege “negligence, mismanagement, or intentional decisions to commit unlawful acts” by corporate directors or officers. Id., at *6.

Duty of Loyalty

The duty of loyalty for for-profit corporations requires that directors not participate in transactions in which they have a direct or indirect interest — economic or otherwise — and that are not substantively fair to the corporation. Summers, 112 S.W.3d at 504 (quoting Hall 1996 WL 355074, at *6). The Tennessee legislature codified this concept of the duty of loyalty by enacting Tenn. Code Ann. § 48-18-302 (1995) “Conflict of Interest Transactions,” which is now Tenn. Code Ann. §§ 48-18-701 through -704. Id.; 2012 Tenn. Pub. Acts 1051 (H.B. 3459) (“SECTION 35. Tennessee Code Annotated, Section 48–18–601, is amended by deleting the language “§ 48–18–302” and by substituting instead the language ‘part 7 of this chapter.’”). If a director violates the provisions contained within the “Conflicting Interest Transactions” statutes codified in Tenn. Code Ann. §§ 48-18-701 through -704 they have breached the duty of loyalty. See Hall, 1996 WL 355074, at *6. Such a determination is based upon all surrounding facts and circumstances of the transaction. Id. (citing 3 Fletcher § 837.60 (citing Fitch v. Midland Bank & Trust Co., 737 S.W.2d 785, 788 (Tenn. Ct. App. 1987)); Neese, 405 S.W.2d at 581).

Enhanced Duties Owed in Closely Held Corporations

 Closely held corporations are those that have a limited amount of stock that is not publicly traded, have shareholders who are small in number, but are familiar with each other; live in the area; are active in the business itself and may even be involved in the management and operations of the corporation, and; are often family members. Cochran v. L.V.R. & R.C., Inc., No. M2004-01382-COA-R3-CV, 2005 WL 2217067, at *3 (Tenn. Ct. App. Sept. 12, 2005). Due to the unique relationships that arise out of closely-held corporations, the directors of closely-held corporations have enhanced fiduciary duties and are required “to act in the utmost good faith and . . . to give the [corporation] the benefit of their care and best judgment and to exercise the powers conferred [to them as directors] solely in the interest of the corporation . . . and not for their own personal interests.” Sanford v. Waugh & Co., 328 S.W.3d 836, 844 (Tenn. 2010) (quoting McRedmond, 46 S.W.3d at 738) (emphasis added). These enhanced duties apply to the provisions of Tenn. Code Ann. § 48-18-301. See id.