NASHVILLE -- A Nashville attorney says a new state law poses a "potential financial disaster" for directors and officers of Tennessee-incorporated businesses because it leaves them unprotected from faulty decisions.
But the Tennessee Bar Association, which brought the change to business-friendly state lawmakers, says the assertion made by attorney Keith Dennen in a blog on the Nashville publication's website is way off base.
"He's wrong," said TBA Executive Director Allan Ramsaur in an interview this week. "The bill only applies to dissolved corporations. We've been tracking this and been trying to get in touch" with Dennen.
Ramsaur said the proposal came from the bar association as part of a multi-faceted update to state corporation laws and "came through a very careful process at TBA.
"It was vetted by this whole group of corporate lawyers" based on the Model Business Corporation Act, Ramsaur added.
The act is a model set of law for states prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association.
Efforts by the Times Free Press to contact Dennen this week were unsuccessful. A recorded message says he is out of the office until next week.
In his column, Dennen wrote the appeal of using a corporate structure "has traditionally been that shareholders, directors and officers do not have to put as much on the line.
"This safety net is gone," he goes on to say. "Signed into law by Gov. Bill Haslam in late March, Tennessee's Public Chapter No. 60 now makes the directors of a corporation personally liable for the debts of a business in the event it fails."
On its face, Dennen said, "the law simply states that each director of a corporation possesses a duty 'to cause' the corporation 'to discharge or make reasonable provision for the payment of claims to creditors.' The practical effect of this law is potential financial disaster."
Board directors, he warned, can now be held personally liable for the debts of the corporation -- debts that they may not even know exist.
He cited as an example a financially struggling corporation that in order to keep the business alive juggles payments to creditors deemed "vital" while other creditors less important to survival "are paid sporadically or not at all. When it is clear that the business cannot survive, the corporation files bankruptcy."
The new law "has implications for corporations, big and small," he said. The column lists several steps directors can take including resigning if the corporation is struggling financially or incorporating in another state.
Dennen's column spread through business circles prompting any number of concerned calls, attorneys said.
B. Riney Green, a partner at the Nashville-based law firm Bass, Berry and Sims and who specializes in corporate law, served as head of the state bar association's revision committee making the recommendation.
"Unfortunately, he is mistaken, has a misunderstanding of what the bill did," Green said of Dennen. "All the 2015 act did with respect to this this issue is Tennessee just incorporated into its corporate busines act the same provision that's in 10 other states."
It's been approved by the American Bar Association, he added. The purpose of the Model Business Corporation Act, first adopted by Tennessee in the 1980s, is providing consistency to states, he said.
He suggested Dennen may not have been "focusing on the fact that the provisions he was looking at only applies to companies in dissolution [and] somehow read that that to mean that directors outside the dissolution process create some type of liabiity for themselves.
"And that's just not at all what the statute does," Green said.
"As a matter of fact," Green added, "the statute creates the safe harbor protection from liability for directors of a corporation which are in dissolution. This is a very non-controversial provision and it's unfortunate that the misunderstanding of it has created kind of confusion."
Serving with Green on the TBA's review committee was Joan MacLeod Heminway, a professor at the University of Tennessee's College of Law professor who spent 15 years practicing corporate law.
She said the panel believed the model act provision " would be very helpful to companies in Tennessee that are in dissolution," she said. "These are firms that have decided to proceed toward termination. They have not ended their existence yet."
The provision, Heminway said, deals with directors of a corporation who are managing and acting acting on behalf of the firm during the windup process that leads toward termination.
It provides more clarity on directors' duties, she said, noting, "here's what you're supposed to do which is basicially provide for the payment of the debts of the firm. ... You're not at that point engaging in any new business."
Complying with the duties sets up a "safe harbor" from liability, Heminway said. "So if the board follows the guidelines they can be sure they will not be held liabile for breach of duty. We thought it was a great idea, not that we always back up boards of directors, but we want things to be clear."
Regarding Dennen, Heminway said, "I'm sure he just has a misimpression."
Contact staff writer Andy Sher at email@example.com or 615-255-0550.