Friday, March 01, 2019 1:07:47 AM
https://www.bendlawoffice.com/2018/01/17/can-shareholders-waive-directors-fiduciary-duties/
Interested Director Transactions
Transactions between a director and his corporation, or between corporations with common directors, often raise the question of whether the interested director has complied with his fiduciary obligation to place the interests of the corporation ahead of his own. Early common law rules governing this relationship have been supplemented with statutory directives.
Traditional case law held that contracts between a corporation and its officers or directors were not void, but were voidable for unfairness or fraud. The burden was on the fiduciary to prove fairness, and transactions in which a corporate fiduciary derived a personal profit were subject to intense scrutiny. The duties of the officers and directors were not viewed as identical to those of other fiduciaries; rather, they were defined on a case by case basis in Texas courts. In the past this duty has been described as one which holds the fiduciary to an "extreme measure of candor, unselfishness, and good faith." The director of a corporation must act fairly and honestly and make full disclosure of all pertinent information in relation to subject matter of any contract he would negotiate with the corporation in which he has a personal interest.
The Code provides a safe harbor for interested director transactions. Section 21.418 provides that a contract or transaction involving an interested director or officer shall not be void or voidable solely for that reason, nor because the interested director or officer was present at the meeting in which the transaction was authorized or his vote was counted in authorizing the transaction, if, after full disclosure, the transaction was (1) authorized by a majority of the disinterested directors (even if they constitute less than a quorum); or (2) approved by the shareholders; or (3) fair to the corporation. The provision codifies the rule of fairness traditionally applied by Texas courts, but additionally insulates transactions that have been properly authorized after full disclosure of the director's interest without further inquiry by the courts into the substantive fairness of the transaction.
Section 21.418 does recognize that an officer or director will be guilty of self-dealing if the plaintiff demonstrates (1) unfairness of the transaction to the corporation, including giving reasons it was unfair, (2) the board of directors did not authorize the transaction by an affirmative vote of the majority of disinterested directors after disclosure of material facts; and (3) the shareholders did not approve of the transaction by a vote after a disclosure of the material facts.
Self-dealing is only deemed to have occurred if the director is "interested." A director is considered to be "interested" if he or she (1) makes a personal profit from a transaction by dealing with a corporation; (2) usurps a corporate opportunity; (3) buys or sells assets of the corporation; or (4) transacts business in his or her capacity as a director, either with a second corporation of which he or she is also a director or is significantly financially associated, or with a family member. The burden of proving that the transaction was fair to the corporation falls upon the defendant. The plaintiff does not have to prove that the corporation would in fact have taken advantage of the opportunity allegedly usurped by the defendant.
Multiple Fiduciary Duties
A special problem is presented when a director sits on multiple boards and the corporations do business with
one another. Since each common director has a duty of loyalty to both corporations, the courts are suspicious of any dealing that might favor one corporation over the other. The burden of proof is on the party wishing to validate the transaction to show that each corporation was dealt with fairly in all respects. At the time of merger of one corporation with another, the director stands in a fiduciary relationship to both corporations. Therefore, he must ensure that any actions he takes are fair to both corporations.
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