Texas law imposes certain fiduciary duties on a director, officer or manager that are owed to the company they serve. Knowing and understanding these fiduciary duties can help deter potential disputes or claims, which is why it’s important to discuss your options with an attorney. At HCWD, PLLC we are ready to assist you. Contact an attorney who can help.
A fiduciary relationship typically arises when a person or entity places confidence or trust in someone else. The duties that a director, officer or manager owe to a company are the duty of obedience, the duty of care and the duty of loyalty.
Duty of Obedience
The duty of obedience requires a director, officer or manager to refrain from committing an ultra vires act. An ultra vires act is one that goes beyond the scope of the company’s governance or permitted purpose. However, modern laws define corporate powers more expansively than before and allow for broad purpose clauses in the certificate of formation of an entity. This means that if the entity was formed for any legal purpose, the acts of a director, officer or manager are now vert broad. For these reasons, there are few cases where a claim for breach of this fiduciary duty has been upheld.
Duty of Care
The duty of care requires a directors, officer or manager be prudent and diligent in managing the entity’s matters. The standard is that a director, officer or manager must handle their duties with such care as an ordinarily prudent man would, under similar circumstances. Under Texas law, a director must exercise his unbiased or honest business judgment in pursuit of corporate interests. Which means that if a director, officer or manager acts in good faith, without corrupt motives, more than likely, will not be held liable for a breach of this duty. This principle is commonly known as the business judgment rule. The are some ways that a director, officer or manager could defeat this rule, but they would have to prove that the governing person engaged in self-dealing or bath faith practices.
Duty of Loyalty
The duty of loyalty requires that a director, officer or manager must act in good faith and must not allow the individual’s personal interest to prevail over the interests of the company. It is about acting with an extreme measure of candor, unselfishness, and good faith. For example, a director, officer or manager must abstain from self-dealing practices or usurpation of a corporate opportunity. Of course, these examples are not the only limitation that a director or officer would have, but they are the most common examples. It should also be noted that there is a way in which a director, officer or manager can participate in a interested-party transaction. The director, officer or manager must first approach the company and fully disclose a corporate opportunity, the company must then reject or decline the opportunity. The director, officer or manager should then obtain approval from disinterested directors or shareholders to be able to proceed with the opportunity without breaching the duty of loyalty. Otherwise, the director, officer or manager would have to show that transaction was fair to the company at the time of the transaction.