In Texas, directors, executives and co-owners of companies have certain duties to the business. In a case called Gearhart Industries vs. Smith International, the Fifth Circuit further defined director duties and held that three broad duties stem from the fiduciary status of corporate directors; namely the duties of obedience, loyalty, and due care."
If a director, co-owner, or a company executive fails to live up to a fiduciary duty, this can result in a shareholder's claim based on the breach.
Those who allege breach of duty would need to prove the director, co-owner or executive failed to fulfill fiduciary obligations. The defendant who is being accused of breaching his duty could raise defenses.
An attorney experienced in business law should be consulted in cases where shareholders are pursuing claims and can represent either shareholders or those accused of breaching a legal duty. With help from an attorney, shareholders can try to prepare their proof to show a breach of duty while directors accused of wrongdoing can introduce doubt as to whether there was a breach and can also raise affirmative defenses.
One of the common arguments used by directors who are sued is an argument they should not be held liable for losses or damages because of the protections of the business judgment rule.
What is the business judgment rule?
The business judgment rule applies to provide broad protection for directors in Texas. The business judgment rule essentially protects directors and others who make decisions on behalf of the business and ensures the directors will not be held liable for the choices they make and the actions they take just because those actions turn out to have a negative or detrimental effect.
In a footnote in Gearhart, the Fifth Circuit stated: "The business judgment rule is a defense to the duty of care. As such, the Texas business judgment rule precludes judicial interference with the business judgment of directors absent a showing of fraud or an ultra vires act. If such a showing is not made, then the good or bad faith of the directors is irrelevant."
Directors are sometimes going to make the wrong decisions when they take action on behalf of a company. They should not be held liable for the outcome of these bad choices as long as they were acting within the scope of their business authority and the decisions they made were reasonable in light of the information available to them. Unless a director acted in self-interest or engaged in fraud, he or she is protected.
The broad scope of the business judgment rule in Texas can make it harder for shareholders to take legal action against directors for any decisions which were made within the scope of their role in the company. Still, while the business judgment rule broadly applies, directors have been held responsible for harming companies when their actions were blatantly fraudulent or when their duty of loyalty was violated.
Contact a business law attorney if you believe your organization needs help. Call Brewer & Pritchard P.C. today at 800-445-8710 or visit www.bplaw.com to schedule a consultation. Serving Houston, Montrose, Galveston Island and surrounding areas.