Business lawyers understand that corporate directors and officers owe fiduciary duties to the firm. These duties include responsibilities to provide oversight, which are colloquially known under Delaware law (and beyond) as Caremark duties, based on a flagship Delaware Supreme Court opinion, In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996). Although historically understood by many (yours truly included) as either a separate fiduciary duty of good faith or a component of the fiduciary duty of care, oversight obligations under Delaware law currently are classified as a component of the fiduciary duty of loyalty. According to the Delaware Supreme Court, “because a showing of bad faith conduct … is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.” Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006).
Successful Caremark claims are difficult to plead and prove, given the relatively high burden of showing bad faith conduct. Historically, almost all claims alleging a breach of Caremark duties in Delaware courts have been dismissed before trial for failure to state a claim. Recently, a case involving Meta Platforms, Inc. directors and officers, including Mark Zuckerberg, came close to making it to trial but settled at the eleventh hour. Nevertheless, with Caremark claims in the news, it seems like a good time to ask whether Tennessee law incorporates Caremark duties in the way Delaware law construes those duties.
A review of decisional law on Westlaw reveals only one published opinion, a federal trial court opinion, citing to the Caremark doctrine in relation to claims involving a Tennessee corporation. That opinion, Lukas v. McPeak, No. 3:11-CV-422, 2012 WL 4359437 (E.D. Tenn. Sept. 21, 2012), aff’d, 730 F.3d 635 (6th Cir. 2013), relates to whether demand may be excused in a shareholder derivative action. In his opinion in Lukas, Judge Thomas Varlan uses Caremark to describe the relevant duties as a basis for articulating the applicable burden of proof involved in assessing demand futility.
Should a court applying Tennessee corporate law be citing to Delaware corporate jurisprudence in relation to a Tennessee corporation, even though Tennessee’s corporate law is based on the Model Business Corporation Act, not the Delaware General Corporation Law? Although the policy underpinnings of the statutes can be different, citations to Delaware law are certainly not unusual. “[I]n matters of corporate law, Tennessee courts often look to Delaware law.” Athlon Sports Commc’ns, Inc. v. Duggan, 549 S.W.3d 107, 125 (Tenn. 2018). In his opinion in Lukas, Varlan maintained that “a plaintiff can only overcome the demand requirement with ‘well-pleaded facts to suggest a reasonable inference that a majority of the directors consciously disregarded their duties over an extended period of time,’” citing to Kenney v. Koenig, 426 F.Supp.2d 1175, 1182 (D.Colo.2006) (quoting David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931 at * 1 (Del.Ch., Feb.13, 2006)). He found that the plaintiff failed to meet this burden of proof and dismissed the case.
One might simply conclude from Varlan’s opinion in Lukas that Tennessee recognizes and applies Delaware’s Caremark doctrine. Yet, the Lukas opinion — a federal district court ruling made in a specific procedural context — assumes the existence of the Caremark doctrine as a descriptive matter without reasoning through its general applicability under Tennessee law. It would be interesting to see how a Tennessee state court judge might reason through whether Tennessee corporate law expressly recognizes director and officer oversight duties in the same way Delaware does, including whether the same standard of conduct would apply and whether oversight duties are classified as separate fiduciary duties or as components of the duty of care or the duty of loyalty. The Tennessee Business Corporation Act (TBCA), in § 48-18-301(a), specifically articulates three duties applicable to directors of a Tennessee corporation, separating good faith out from care and loyalty: “A director shall discharge all duties as a director, including duties as a member of a committee: (1) In good faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) In a manner the director reasonably believes to be in the best interests of the corporation.” An officer having “discretionary authority” over a matter is charged with the same duties in discharging that authority under TBCA § 48-18-403.
Of note in this regard, the Utah Supreme Court expressly rejected Delaware’s categorization of oversight duties as subsidiary elements of the fiduciary duty of loyalty in Rawcliffe v. Anciaux, 2017 UT 72, ¶ 18, 416 P.3d 362, 370 (2017). Utah’s corporate law (the URBCA), as applied in the case, was based on an earlier version of the Model Business Corporation Act. The court in Rawcliffe found that the duties of good faith and loyalty are separate (but sometimes overlapping) fiduciary duties that require different standards of conduct, rejecting the Delaware Supreme Court’s characterization in Stone v. Ritter.
While it may seem like a pedantic exercise (and therefore unimportant) to ask whether Tennessee courts would follow Delaware courts in defining and categorizing director and officer oversight duties, the relevant standards of conduct and the availability of, for example, the business judgment rule, exculpation, indemnification, or director and officer liability insurance may hang in the balance based on the classification of a claim against a director or officer for a breach of their fiduciary duties. Along those lines, the Rawcliffe court in Utah expressly noted that “the URBCA allows corporations to indemnify their directors for a breach of the statutory duty of care identified in Utah Code section 16-10a-840(1)(b), but does not allow them to indemnify their directors for a breach of the duty of good faith identified in section 16-10a-840(1)(a), or a breach of the duty of loyalty identified in section 16-10a-840(1)(c),” recognizing that the classification of a specific breach claim may have substantive effect. Rawcliffe, 416 P.3d at 370.
And so we must wait to know for sure whether Tennessee fully embraces Delaware’s law on director and officer oversight. However, the Utah Supreme Court’s opinion in Rawcliffe may offer important persuasive authority in that regard. The statutory references in that opinion parallel those that could be made under Tennessee law.
Parenthetically, while there has been debate and discussion over whether corporate officers owe the same oversight duties as corporate directors, a 2023 Court of Chancery opinion in Delaware, In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343 (Del. Ch. 2023), held that officers effectively owe the same fiduciary duties of oversight as directors in context. Vice Chancellor Travis Laster’s opinion in the case was clear: “Failing to confirm that officers owe oversight duties would undermine the directors’ ability to fulfill their statutory obligation to direct and oversee the business and affairs of the corporation.” Id. at 367. The In re McDonald’s opinion also “concludes that oversight liability for officers requires a showing of bad faith. The officer must consciously fail to make a good faith effort to establish information systems, or the officer must consciously ignore red flags.” Id. at 375. Although the TBCA sets forth the same fiduciary duties for officers as for directors, the contextual analysis of officer oversight duties also is an open issue in Tennessee.
Claims of director and officer malfeasance persist. Many of these claims sound in breaches of fiduciary duty. As a result, litigation involving director oversight duties in Tennessee corporations may receive future judicial attention. In that event, this article may establish foundation for any claim in that regard. However, even absent relevant litigation, the analysis shared here may be useful to those advising Tennessee directors and officers on the nature and extent of their fiduciary duties under Tennessee law.
[Republished from the Tennessee Bar Association’s Connect newsletter for the Business Law Section published on July 28, 2025. The original publication is only available to Tennessee Bar Association Business Law Section members.]