Search results

3 results

April 1, 2020Sharrissa Stratton

Liability of Parent Corporation -- Whether the parent is liable for the actions of its subsidiary when the parent does not perpetrate fraud

In R&M Mixed Beverage Consultants, Inc. v Safe Harbor Benefits, Inc. 578 S.W.3d 218 (Tex.App. - El Paso 2019, no pet.), the Court of Appeals cites the Texas Supreme Court for the proposition that there must be evidence that one of the corporations was using the other for purpose of perpetrating actual fraud for the defendant's direct personal benefit. The Court found that the record showed no evidence of actual fraud and therefore the parent would not be liable for the subsidiary's action.

Management Responsibilities of Governing Persons of Corporations and Limited Liability Companies

Although this paper will focus primarily on LLCs, it is worthwhile to consider the duties typically imposed on corporate directors, as the same duties show up in cases involving LLCs. Directors have a duty to discharge their responsibilities in accordance with the duty of care, the duty of loyalty, and the duty of obedience. The duty of care mandates that a director discharge his or her responsibilities with the care that an ordinarily prudent person would exercise in similar circumstances. Corporate statutes based on the Model Business Corporation Act use the phrase “an ordinarily prudent person in a like position would exercise under similar circumstances.”1 This statutory language allows a court to look to a particular organization rather than a hypothetical entity. Applying this standard, a court may consider the background, qualifications, and experience of a director and the role the director plays in the corporation when measuring the director’s conduct. The ordinarily prudent person standard is associated with tort-law and simple negligence, but in the corporate world, it has been incorporated into the duty of care and case law applies a gross negligence standard. Directors also usually enjoy the benefits of the business judgment rule. The duty of loyalty requires a director to act in good faith in what the director reasonably believes to be the best interests of the corporation and to not derive a personal profit or advantage at the expense of the corporation. The duty of loyalty comes into play if a director or officer wants to compete with the corporation or take an opportunity of the corporation for the director’s own benefit. The duty of obedience dictates that a director obey the law and the corporation’s organizational documents. Corporate statutes commonly provide a procedure for approval of a director’s conflicting interest transaction. Most corporate statutes now permit the corporation’s formation document to relieve directors from monetary liability for breaches of the duty of care. The provisions of the TBOC governing for-profit corporations (like the predecessor Texas Business Corporation Act) do not explicitly set forth or define the fiduciary duties of corporate directors; however, case law generally recognizes that directors owe a duty of obedience, a duty of care, and a duty of loyalty.

Splitting The Pie — Structuring Equity Compensation In Alternative Entities

One key difference between equity compensation in alternative entities and in corporations derives from the fundamental difference between the tax consequences of issuing equity in exchange for services in each form of entity. Receipt of stock from a corporation in exchange for services is generally taxable, absent use of an incentive stock option plan, while receipt of interests in an LLC or partnership may be non-taxable if the interests issued are profits interests.