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

[I]f the acts or things are or may be that which the majority of the company have aright to do, or if they have been done irregularly, negligently, or imprudently, orare within the exercise of their discretion and judgment in the development orprosecution of the enterprise in which their interests are involved, these would notconstitute such a breach of duty, however unwise or inexpedient such acts mightbe, as would authorize interference by the courts at the suit of a shareholder. 35In Gearhart the Court commented that “[e]ven though Cates was decided in 1889, anddespite the ordinary care standard announced in McCollum v. Dollar, supra, Texas courts to thisday will not impose liability upon a noninterested corporate director unless the challenged actionis ultra vires or is tainted by fraud.” 36Neither Gearhart nor the earlier Texas cases on which it relied referenced “grossnegligence” as a standard for director liability. If read literally, the business judgment rulearticulated in the case would protect even grossly negligent conduct. Federal district courtdecisions in FDIC and RTC initiated cases, however, have declined to interpret Texas law thisbroadly and have held that the Texas business judgment rule does not protect “any breach of theduty of care that amounts to gross negligence” or “directors who abdicate their responsibilitiesand fail to exercise any judgment.” 37 These decisions “appear to be the product of the specialtreatment banks may receive under Texas law” and may not be followed to hold directors “liablefor gross negligence under Texas law as it exists now” in other businesses. 38Gross negligence in Texas is defined as “that entire want of care which would raise thebelief that the act or omission complained of was the result of a conscious indifference to theright or welfare of the person or persons to be affected by it.” 39 In Harrington, the Courtconcluded “that a director’s total abdication of duties falls within this definition of grossnegligence.” 40The business judgment rule in Texas does not necessarily protect a director with respectto transactions in which he is “interested.” It simply means that the action will have to bechallenged on duty of loyalty rather than duty of care grounds. 4135363738394041Id. at 849.Gearhart, 741 F.2d at 721.FDIC v. Harrington, 844 F. Supp. 300, 306 (N.D. Tex. 1994); see also FDIC v. Schreiner, 892 F.Supp. 869 (W.D. Tex.1995); FDIC v. Benson, 867 F. Supp. 512 (S.D. Tex. 1994); RTC v. Acton, 844 F. Supp, 307, 314 (N.D. Tex. 1994);RTC v. Norris, 830 F. Supp. 351, 357-58 (S.D. Tex. 1993); FDIC v. Brown, 812 F. Supp. 722, 726 (S.D. Tex. 1992); cf.RTC v. Miramon, 22 F.3d 1357 (5 th Cir. 1994) (followed Harrington analysis of Section 1821(K) of the FinancialInstitutions Reform, Recovery and Enforcement Act (“FIRREA”) which held that federal common law of directorliability did not survive FIRREA and applied Texas’ gross negligence standard for financial institution director liabilitycases under FIRREA).Floyd v. Hefner, 2006 WL 2844245 (S.D. Tex. Sept. 29, 2006).Burk Royalty Co. v. Walls, 616 S.W.2d 911, 920 (Tex. 1981) (citing Missouri Pacific Ry. v. Shuford, 72 Tex. 165, 10S.W. 408, 411 (1888)).844 F. Supp. at 306 n.7.Gearhart, 741 F.2d at 723 n.9.5446095v.110