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Know Your Role: Fiduciary Duties of the Corporate Director

For most legal issues, Texas corporations are governed by the Texas Business Organizations Code.  However, one topic that is not expressly addressed is the fiduciary duties of corporate directors.  Instead, case law has established the principle that directors owe their corporations three general fiduciary duties: a duty of obedience, a duty of care, and a duty of loyalty.  As a corporate director, each of your actions must take into consideration these duties, and failure to do so could result in substantial damage to both the company and yourself.

The duty of obedience prohibits a director from pursuing actions outside of the authorized powers of the corporation, but this duty is rarely an area of concern given that most modern corporate laws define corporate powers broadly and permit extensive purpose clauses in the certificate of formation. Therefore, courts rarely impose personal liability on directors for illegal or ultra vires acts of corporate agents unless the directors either participated in the act or had actual knowledge of the act.

The duty of care requires a director to be diligent and prudent in managing the corporation’s affairs. The established standard for this duty requires that a director handle its corporate duties with such care as an ordinarily prudent person would use under similar circumstances. However, compliance with this duty is aided by the principle known as the business judgment rule, which provides that a director who acts in good faith and without corrupt motive will generally not be held liable for mistakes of business judgment that damage corporate interests.  This caveat thereby protects all but obvious fraudulent or illegal conduct.  Therefore, directors may, in good faith and with ordinary care, rely on information, opinions, reports, or statements prepared or presented by officers or employees of the corporation, or by legal counsel and others with professional or other expertise without being overly concerned with violating the duty of care.

The final duty, the duty of loyalty, requires honesty, good faith and loyal conduct towards the best interests of the company.  While case law does provide examples of certain transactions or conduct that implicate the duty of loyalty, such as self-dealing and usurpation of a corporate opportunity, similar to the duty of care, most corporation laws include stipulations that leave the door open for interested-director transactions so long as there is full disclosure by the interested director and approval by the disinterested directors or the shareholders.  Likewise, even without full disclosure, the transaction will oftentimes withstand challenge if it passes scrutiny for “fairness” to the corporation.

While each of these obligations are potentially weakened by the various exceptions and limited applications, it is still critical for directors to understand their role in the corporate structure and to respect the duties placed upon them.  A corporation depends on its leaders, and as a director, you owe it to your company to fulfill your duties.

Brian Albert

Phone: 281-367-122

Fax: 281-210-1361

[email protected] 

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