fiduciary duty issues in m&a transactions - Jackson Walker LLP

and commented that (i) the duty of obedience requires a director to avoid committing ultra viresacts, i.e., acts beyond the scope of the authority of the corporation as defined by its articles ofincorporation or the laws of the state of incorporation, (ii) the duty of loyalty dictates that adirector must act in good faith and must not allow his personal interests to prevail over theinterests of the corporation, and (iii) the duty of due care requires that a director must handle hiscorporate duties with such care as an ordinarily prudent man would use under similarcircumstances. 22 Good faith under Gearhart is an element of the duty of loyalty. Gearhartremains the seminal case for defining the fiduciary duties of directors in Texas, although thereare subsequent cases that amplify Gearhart as they apply it in the context of lawsuits by theFederal Deposit Insurance Corporation (“FDIC”) and the Resolution Trust Company (“RTC”)arising out of failed financial institutions. 23 Many Texas fiduciary duty cases arise in the contextof closely held corporations. 241. Loyalty.a. Good Faith.The duty of loyalty in Texas is a duty that dictates that the director act in good faith andnot allow his personal interest to prevail over that of the corporation. 25 The good faith of adirector will be determined on whether the director acted with an intent to confer a benefit to thecorporation. 26 Whether there exists a personal interest by the director will be a question of fact. 27b. Self-Dealing Transactions.In general, a director will not be permitted to derive a personal profit or advantage at theexpense of the corporation and must act solely with an eye to the best interest of the corporation,unhampered by any pecuniary interest of his own. 28 The court in Gearhart summarized Texaslaw with respect to the question of whether a director is “interested” in the context of self-dealingtransactions:A director is considered “interested” if he or she (1) makes a personal profit froma transaction by dealing with the corporation or usurps a corporate opportunity. . .; (2) buys or sells assets of the corporation . . .; (3) transacts business in his22232425262728Gearhart, 741 F.2d at 719-721; McCollum v. Dollar, 213 S.W. 259 (Tex. Comm’n App. 1919, holding approved); seeLandon v. S & H Marketing Group, Inc., 82 S.W.3d 666 (Tex. App.—Eastland 2002), which quoted and repeated thesummary of Texas fiduciary duty principles from Gearhart.Floyd v. Hefner, 2006 WL 2844245 (S.D. Tex. Sept. 29, 2006); see FDIC v. Harrington, 844 F. Supp. 300 (N.D. Tex.1994).See Flanary v. Mills, 150 S.W.3d 785 (Tex. App. – Austin 2004) (uncle and nephew incorporated 50%/50% ownedroofing business, but never issued stock certificates or had board or shareholder meetings; uncle used corporation’sbanking account as his own, told nephew business doing poorly and sent check to nephew for $7,500 as his share ofproceeds of business for four years; court held uncle liable for breach of fiduciary duties that we would label loyaltyand candor.)Gearhart, 741 F.2d at 719.International Bankers Life Insurance Co. v. Holloway, 368 S.W.2d 567 (Tex. 1967), in which the court indicated thatgood faith conduct requires a showing that the directors had “an intent to confer a benefit to the corporation.”Id. at 578.A. Copeland Enterprises, 706 F. Supp. at 1291; Milam v. Cooper Co., 258 S.W.2d 953 (Tex. Civ. App. — Waco 1953,writ ref’d n.r.e.); see Kendrick, The Interested Director in Texas, 21 Sw. L.J. 794 (1967).5446095v.18