Officer & Director Liability Lawyer TX
Officers and directors of a corporation have certain duties of loyalty and care to the corporations they serve. Before entering into any important business transactions such as mergers and acquisitions, they must use due diligence. Whenever an officer subordinates the interests of the corporation to his or her own best interests, those duties of loyalty and care are breached.
The Business Judgment Rule
So long as directors and officers comply with their fiduciary obligations, they are entitled to the protection of the business judgment rule, which provides that directors’ or officers’ decisions are presumed to have been made on an informed basis and in good faith and with an honest belief that the action taken was in the best interests of the corporation. This rule essentially states that the courts will not substitute its business judgment or interfere with corporate affairs over that of the corporate officer or director in decisions affecting the rights of stockholders.
There are exceptions to when the business judgment rule applies such as when a director or office is deemed to have violated their duties of care, loyalty and dealing in good faith.
The Duty of Care
Directors and officers are required to act prudently and to consider all available information in monitoring or overseeing the corporation’s business or to handle their duties with such care as an ordinarily prudent person would use under similar circumstances. These include efforts to:
- Obtain all relevant information.
- Evaluate corporate actions.
- Consider expert advice.
- Make inquiries and test assumptions.
- Take steps to understand the terms of any major transaction.
- Engage in candid discussions.
- Understand the corporate’s financial statements.
- Be informed of the corporation’s operations and performance.
- Implement reporting and information systems.
Before a court will consider that there is a breach of the officers’ or directors’ duties, there generally must be gross negligence or willful indifference to shareholder interests or irrational conduct when making important decisions.
Examples include cases where the directors failed to question an officer’s report of a merger or of the terms of the deal. There may not be a breach of the duty of care where the directors did not detect violations of the law despite systems in place to do so and there was no reason for them to know. If they were aware and failed to act, there is a breach of the duty of care.
Liability may be imposed where the directors fail to implement any reporting or compliance system as this may be a failure to act in good faith.
The Duty of Loyalty
The duty of loyalty is one of acting in good faith and in the best interests of the corporation and stockholders. It prohibits self-dealing and receiving improper personal benefits stemming from the director’s or officer’s relationship with the corporation. Examples of a breach of the duty of loyalty include:
- Conflict of interest.
- Personally exploiting an opportunity that should have been presented to the corporation.
- Competing with the corporation without the informed and express consent of the disinterested directors and officers.
- Using corporate assets for non-corporate purposes.
- Bad faith conduct.
A director or officer who breaches their duty of care or loyalty to the corporation cannot seek indemnification from the corporation.
The Duty of Good Faith
Dealing in bad faith is intentionally engaging in an act that is adverse to the best interests of the corporation and done for a dishonest purpose or ill will. Examples include:
- Deliberately withholding material information to mislead shareholders.
- Engaging in a transaction that does not advance corporate interests and violates the law.
- Making decisions primarily motivated by personal interest.
- Actions that are dishonest or morally ambiguous.
- Failing to prevent self-dealing or waste by another director or officer.
- Abdicating responsibility and failing to exercise any judgment.
It is a question for the trier of fact to determine whether the director or officer acted with an intent to confer a benefit on the corporation or allowed his or her personal interest to trump the corporation’s.
A director or officer may be indemnified pursuant to its bylaws where they have acted in good faith or in a manner they reasonably believed to have been in the corporation’s best interests.
Most bylaws do not permit indemnification where the director or officer is determined to have acted with gross negligence or in willful disregard of their duties including knowingly violating the law or engaging in self-dealing to derive an improper personal benefit or profit at the expense of the corporation.
Shareholder or Derivative Actions
Shareholders may bring a lawsuit against directors or officers for breach of fiduciary duty called a derivative action. Before bringing such a suit, the Texas shareholder is required to file a written demand to maintain the suit. The lawsuit cannot be filed until 90 days after delivery of the demand notice. The waiting period can be shortened if the shareholder is notified that the corporate Board has rejected the demand or if irreparable harm would result to the corporation if the 90 day waiting period must first be exhausted.
A successful claimant can recover any profits earned if there was illegal self-dealing, and void any contracts entered into in bad faith or through gross negligence. If you were the defendant and prevail, you may be able to have your legal fees and other costs indemnified by the corporation.
Attorneys for Officer and Director Liability Claims
Determining whether a director or officer of a corporation breached his or her duties of care, loyalty, and good faith to the corporation and its shareholders can be difficult to ascertain. In such matters, you need the advice of the attorneys from Byrd Davis Alden & Henrichson, LLP who have the knowledge and experience in dealing with corporate shareholder lawsuits and can help you ascertain whether there has been a breach of director or officer responsibilities.
If you are facing a shareholder lawsuit or are contemplating legal action against a corporation, contact our law office at 512-271-5304 to arrange for a consultation. Our Austin business litigation & defense lawyers want to help you.