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Fiduciary Duties of Governing Persons in Texas Business Entities
This set of slides describes the relationship and duties of the Board of Directors to corporation and how that affects corporate governance.
Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
This article discusses fiduciary duties, some history regarding fiduciary duties in Texas, and fiduciary duties with respect to LLCs.
Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the Texas business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well-settled, but the Texas Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary-duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
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.
A Look at Board Duties and Conflicts for Corporations and LLCs
The world of corporate governance is experiencing a paradigm shift in recent years—with the movement away from a passive governing board and a rise in shareholder activism and shareholder democracy. This shift is marked by some inherent conflict-of-interest issues including (1) an increase in the number of constituent representatives on the board; (2) the rise of the influence of private equity; and (3) equity-interest owners demanding a right to nominate directors and managers.
Fiduciary Duties of Directors in M&A Transactions
There are several landmark cases which define the duties of directors in DE and TX companies, including the duties of obedience, loyalty and care. Within the last five years, there have been a number of cases providing additional color.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not wellsettled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary-duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Update On Fiduciary Duty For Privately Held Corporations and LLCs
These are the presentation slides.
Drafting Considerations for Exculpation of Duties (Including Fiduciary) in LLC Agreements
This paper will discuss and set out suggested provisions for Texas LLC Agreements for exculpation of “Governing Persons” under the TBOC and in the LLC contractual provisions. This process has several component parts, including statutory provisions, common law directives and influences from Delaware law, as well as contractual “glosses” that have developed in practice for specific activities. In drafting an LLC Agreement, the practitioner must be cognizant of the actual statutory provisions governing the duties of Governing Persons, the case law that is developing about LLCs, as well as the statutorily permitted management structures unique to the LLC. The statutory provisions for LLCs on exculpation of Governing Persons are not the same as those in effect for either corporations or partnerships, so traditional exculpatory provisions cannot be directly copied. In addition to statutory formulations, and the growing body of case law on limited liability companies, common law on agency must be considered. Further, the management of the LLC as an entity can be accomplished by at least three separate groups, the members, the managers and the officers, depending on how one determines to organize the entity. Management contracts by affiliated entities add another level of complexity. The multiplicity of choices for daily management requires a translation of traditional corporate and partnership formulations. This paper will raise the questions and suggest possible responses in this ever fertile field of legal controversies.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Fiduciary Duties for Employees in Texas - A Moving Concept
For centuries, courts have required trustees to serve with the same devotion that they serve their own interests. This duty of loyalty, coupled with the hammer of restitution of any ill-gotten gain, has defined a very special relationship in the law: the fiduciary relationship. As Justice Cardozo famously penned in Meinhard v. Salmon, “[a] trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”2 As time has passed, however, courts have created different standards and remedies for different fiduciaries. There are numerous theories that attempt to unify the concept of fiduciary law, i.e., economic, anti-economic, contractual, property based, unjust enrichment, reliance, unequal relationship, and power and 3discretion. In the end, however, there is no clear map that creates a simplistic black and white test for practitioners and judges in this equitable forest. Thus, the question for practitioners is when does an employee become a “fiduciary,” and thus, require the “punctilio of an honor” to the employer? The legal concept of fiduciary relationships first developed in England’s courts of chancery.4 These courts of equity traditionally resolved matters involving breach of trust or confidence.5 During this period, the courts had not yet adopted the term “fiduciary.” Indeed, the case law from the period describes fiduciary obligations with language typically used in trust matters. As the chancery courts became more sophisticated, however, “a standard technical vocabulary [gained] recognition.”6 As a result, the word “trust” became a narrowly defined term of art, which excluded the concept of fiduciary relationships. This created quite a quandary for late-eighteenth and early-nineteenth century practitioners, who were left to argue a branch of trust law, without using the term “trust.” Against this backdrop, the term “fiduciary” “was adopted to describe [those] situations which fell short of the now strictly-defined trust.”
Governing Persons in Action: Overview of Fiduciary Duties, Excupation, and Indemnification in Texas Business Organizations Code
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Fiduciary Duty Exculpation - Drafting Notes
These are the drafting notes from the author regarding this topic. Essentially, an outline of the topic.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well-settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Fiduciary Duties in Alternate Entities
Overview of Traditional Fiduciary Duties and Alternate Entities Relevant Delaware Statutes Governing Alternate Entities Relevant Texas Statutes Governing Alternate Entities Standard Contractual Provisions in Alternate Entity Agreements Delaware Supreme Court Cases
Director and Officer and Controlling Shareholder Duties and Liabilities Under Texas Law - Fiduciary Duties and Shareholder Oppression
The prior corporation laws and other entity statutes were codified in the Texas Business Organizations Code, which became effective for all Texas corporations on January 1, 2010. The Texas Business Corporation Act (“TBCA”) provisions referred to herein have been carried forward substantially in the Texas Business Organizations Code, which is referred to throughout as the “BOC” or the “Texas BOC”.
Non-Compete, Non-Solicit, Breach of Fiduciary Duties
Drafting issues for non-competition clauses, non-solicitation clauses, and breach of fiduciary duties.
Non-Compete Non-Solicit Breach of Fiduciary Duties
This article is a set of cases that examine various aspects of non-competition clauses in agreements, non-solicitation, and breaches of fiduciary duties.
Duties of Owners and Governing Persons Among Different Types of Entities
The concepts that underlie the fiduciary duties of corporate directors have their origins in English common law of both trusts and agency from over two hundred years ago. The current concepts of those duties in both Texas and Delaware are still largely matters of evolving common law.
Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990's have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not wellsettled, but the new Business Organizations Code (“BOC”) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Duties, Exculpation From Duties and Indemnification of Governing Persons in Limited Liability Companies
Indemnification provisions under the limited liability company statutes, including the Texas Business Organizations Code (the “TBOC”), are likely to be under significant judicial scrutiny in the next few years, as the economic downturn causes claims and controversies against members and managers to arise. This article will focus on best practices to protect persons serving as members, managers and officers of an LLC, with an analysis of statutory foundations, current and evolving case law and suggested drafting solutions. As we all understand the basics of corporate law, which serves as the foundation of the TBOC statutory indemnification provisions, indemnification only is available if the accused is able to establish that there was no “misconduct.” Stated in the converse, indemnification payments, if successful, will only consist of advancement of defense costs. Once this fundamental premise is clear, indemnification rests on two topics: (A) definition of, and appropriate exculpation for, the duties applicable to the proposed indemnities, and (B) terms and conditions of advancement of expenses. Indemnification insurance also needs to be a part of the indemnification process. An explanation of terms is also in order. Under the TBOC, the generic term for a person operating in a fiduciary duty capacity is “governing person.” The term “governing person” includes directors, members of a member managed LLC and managers of a manager managed LLC. The main provision on exculpation and indemnity are in Section 7 and 8 of the “HUB” of the TBOC, and are drafted in terms of “governing persons,” and I will use the LLC specific terms of members and managers, and include a discussion of officers because of the specific statutory structure in place for LLCs. A cautionary note on ethics is also in order at the beginning of this analysis. Who you are representing as you are exculpating is quite important. This is an area that ALWAYS has a conflict of interest because you are considering the relationship of the agent to the principal, and is a question that is usually resolved in the formation stage, where there is usually only one lawyer. As a result, it is an area where you should take time to explain to the client, whoever that client is, the nature of fiduciary duties, their exculpation and indemnification, because they cannot begin to waive any conflicts until they have had a complete disclosure, which I believe requires the client to actually understand what they are waiving. I personally find this quite difficult to do, but I soldier on.
Director Duties in Troubles Times: Process and Proof
The conduct of corporate directors and officers in Texas is subject to particular scrutiny in the context of executive compensation and other affiliated party transactions, business combinations, whether friendly or hostile, and when the corporation is charged with illegal conduct. The high profile stories of how much corporations are paying their chief executive officer (“CEO”) and other executives, corporate scandals, bankruptcies and related developments have further focused attention on how directors and officers discharge their duties, and have caused much reexamination of how corporations are governed and how they relate to their shareholders. The individuals who serve in leadership roles for corporations are fiduciaries in relation to the corporation and its owners. These troubled times make it appropriate to focus upon the fiduciary and other duties of directors and officers, including their duties of care, loyalty and oversight. Increasingly the courts are applying principals articulated in cases involving mergers and acquisitions (“M&A”) to cases involving executive compensation, perhaps because both areas often involve conflicts of interest and self-dealing or because in Delaware, where many of the cases are tried, the same judges are writing significant opinions in both areas. Director and officer fiduciary duties are generally owed to the corporation and its shareholders, but when the corporation is on the penumbra of insolvency, the beneficiaries of those duties may begin to expand to include the creditors.
How Recent Fiduciary Duty Cases Affect Advice to Directors and Officers of Delaware and Texas Corporations
The conduct of corporate directors and officers is subject to particular scrutiny in the context of business combinations (whether friendly or hostile), executive compensation and other affiliated party transactions, allegations of illegal or improper corporate conduct, and corporate insolvency. The individuals who serve in leadership roles for corporations are fiduciaries in relation to the corporation and its owners. Increasingly the courts are applying principals articulated in cases involving mergers and acquisitions (“M&A”) to cases involving executive compensation, perhaps because both areas often involve conflicts of interest and self-dealing or because in Delaware, where many of the cases are tried, the same judges are writing significant opinions in both areas. Director and officer fiduciary duties are generally owed to the corporation and its shareholders, but when the corporation is insolvent, the constituencies claiming to be beneficiaries of those duties expand to include the entity’s creditors.
Delaware Supreme Court Holds Directors’ Fiduciary Duties Require Monitoring Mission Critical Risks
A recent Delaware Supreme Court opinion provides guidance to directors for overseeing enterprise risk and discusses potential claims for breach of fiduciary duty when this oversight is insufficient.
Summer, 2014
Includes articles entitled: "Texas Supreme Court’s Recent Shareholder Oppression Opinions Reaffirm Primacy Of Common Law Fiduciary Duties" by Byron Egan and Michael L. Laussade; "Texas Pattern Jury Charge on Trade Secret Misappropriation Near Completion" by Joe Cleveland; and "CFPB Targets Law Firm with First Civil Enforcement Action" by Justin M. Long and John Podvin.