What are the corporate fiduciary duties of corporate officers and directors in Texas?
When corporate officers and directors make decisions and take actions on behalf of the corporation, they must put the company’s interests above their own and take care not to breach the fiduciary duties that they owe to the company and its shareholders.
If they do not, they can be held personally liable for their actions. In this article, we will provide an overview of corporate fiduciary duties in Texas, including:
- A discussion of the fiduciary duties of corporate officers and directors,
- The consequences for breaches of fiduciary duty, and
- How to avoid lawsuits for breaches of fiduciary duty.
What are the Fiduciary Duties of Corporate Officers and Directors?
A fiduciary, in the context of corporate law, is a person who acts on behalf of the company in setting company policies, the appointment of officers, overseeing the corporation’s operations, and managing the day-to-day affairs of the company.
Corporate fiduciaries who are accountable to the company and its shareholders for their actions may include:
- The board of directors,
- Executive director,
- Controlling shareholders, and
- Others who manage the corporation’s day-to-day affairs and make decisions on behalf of the corporation.
Corporate fiduciaries must act in the company’s best interests, and Texas law identifies three distinct duties that corporate fiduciaries owe to their company including the 1) duty of obedience, 2) duty of care, and 3) duty of loyalty.
Duty of Obedience
The duty of obedience refers to the requirement that corporate officers and directors do not exceed the scope of what the corporation is permitted to do and that they comply with the company’s constitutional documents and the limits imposed by Texas law.
These limitations on the permissible scope of a corporation’s activities can be found in:
- The company’s constitutional documents (the Articles of Incorporation, for example),
- Texas law,
- Federal law, and
- State and federal regulations.
Any action that is taken by a corporate fiduciary that exceeds the scope of permissible activity could be seen as a breach of the fiduciary duty of obedience.
Duty of Care
A corporate officer or director must exercise the care of an ordinary and prudent person in their decision and actions taken on behalf of the corporation.
In McCollum v. Dollar, in the context of a corporate director’s liability to creditors, the Texas Commission of Appeals found that whether a corporate fiduciary has negligently breached their duty of care is a case-specific analysis that turns on factors like “the character of the corporation, the condition of its business, the usual method in which such corporations are managed, and any and all other relevant facts that tend to throw light upon the question of the proper discharge of the duty as a director.”
The Business Judgment Rule
Not every bad result is considered a breach of the duty of care, however, even if the action taken was negligent or unwise…
As the Texas Supreme Court explains in Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015), the business judgment rule shields officers and directors from liability, even for “actions that are negligent, unwise, inexpedient, or imprudent,” when those actions are “within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.”
Duty of Loyalty
The most common claims for breach of fiduciary duty by corporate officers or directors in Texas are based on alleged breaches of the duty of loyalty.
In short, the duty of loyalty owed by corporate fiduciaries prohibits “self-dealing.” Corporate officers must act in good faith, and their actions must be in the best interests of the corporation.
A corporate officer cannot make decisions or take actions on behalf of the corporation that furthers their self-interests, and they cannot make decisions or take actions on behalf of the corporation that would benefit a third party to the detriment of the corporation or when the corporate officer also has an interest in that third party.
When does a corporate officer have an interest in a transaction that would raise red flags? In Loy v. Harter, 128 S.W.3d 397, 407 (Tex. App.—Texarkana 2004, pet. denied), the Sixth District Texas Court of Appeals provides some examples of when an officer or director is considered “interested,” including when they:
- Personally profit from a transaction,
- Usurp a corporate opportunity,
- Buy or sell the assets of a corporation,
- Transact business in their official capacity with a second corporation of which they are also an officer or director,
- Transact business in their official capacity with a second corporation with which they are significantly financially associated, or
- Transact business in their official capacity with a family member.
Note that, when these situations arise, there is a procedure in Texas Business Organization Code §21.418 that can be followed to get authorization for the transaction and avoid claims of breaches of the fiduciary duty of loyalty.
Lawsuits for Breach of Fiduciary Duty
It is critical that corporate officers, directors, or other corporate fiduciaries understand their fiduciary duties and how to avoid breaches because the fiduciary can be held personally liable for a breach of their duties.
A corporation can sue its fiduciaries for damages, or the corporation’s shareholders can bring a derivative action on behalf of the corporation to enforce rights or claims for monetary damages that the corporation has filed to bring on its own.
Third parties may also file lawsuits against the corporation or, in some situations, its fiduciaries to recover damages for harms caused by a fiduciary’s action or inaction.
Avoiding Breaches of Fiduciary Duty in Texas
If you are a corporate officer, director, controlling shareholder, or other corporate fiduciary, take care to avoid breaches of your fiduciary duties:
- Learn your responsibilities in your role as director, officer, or controlling shareholder,
- Learn what your fiduciary duties are in the context of your corporate roles,
- Attend all meetings that involve your role and actively seek feedback from others when there is a question of whether your actions will breach one of your fiduciary duties,
- Research all decisions you make on behalf of the company to ensure you are making informed decisions that are in the corporation’s best interests,
- Immediately disclose all conflicts involving personal benefits or duties to other corporations,
- Carefully document your decision-making processes on behalf of the corporation,
- Abstain from making decisions that may benefit you personally, a family member, or another company that you have an interest in or to which you owe fiduciary duties, and
- Consult with corporate counsel before making decisions that could result in allegations of a breach of fiduciary duty or self-dealing.
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