Texas Corporate directors and officers owe fiduciary duties of obedience, loyalty and due care to the corporation. Gearhart Indus., Inc. v. Smith Intern., Inc., 741 F.2d 707, 719 (5th Cir. 1984); Loy v. Harter, 128 S.W.3d 397, 407 (Tex. App.—Texarkana 2004, pet. denied). In this context, directors and officers are probably most often found liable for violating the fiduciary duty of loyalty.
“The duty of loyalty dictates that a corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. The duty of loyalty is described as requiring an extreme measure of candor, unselfishness, and good faith on the part of the officer or director.” Loy v. Harter, supra, p. 407. “An officer or director is considered “interested” if he or she (1) makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity, (2) buys or sells assets of a corporation, (3) transacts business in his or her officer’s or director’s capacity with a second corporation of which he or she is also an officer or director or is significantly financially associated, or (4) transacts corporate business in his or her officer’s or director’s capacity with a family member.” Loy v. Harter, supra, pp. 407–08.
A Texas corporation can make these insider transactions valid by following proper corporate formalities. More specifically, Texas Business Organizations Code § 21.418 sets forth procedures that can be followed to authorize and make this type of transaction valid. In general, these procedures require full disclosure by the interested directors and officers as well as approval of the transaction by the disinterested directors or shareholders. Further, even if this approval is not obtained, the transaction will be deemed valid if it meets the fairness scrutiny of the statute. Additionally, shareholders of a privately held corporation may enter into a shareholder agreement governing these transactions (see Tex. Bus. & Org. Code § 21.101. In fact, the Texas Supreme Court in the recent case of Richie v. Rupe, 443 S.W.3d 856, 881 (Tex. 2014) seemed to encourage shareholder agreements.
In conclusion, Texas corporate officers and directors must strictly comply with their fiduciary duties including the duty of loyalty. These issues can be addressed in advance in a manner that will protect the officers and directors from liability and simultaneously benefit the corporation. This may be done by following applicable procedures set forth in the Texas Business Organizations Code or through a shareholder agreement. This is why it is important for corporations of all sizes to follow proper corporate formalities.