Corporate Interested Directors Liability In Texas Case Law

Under Texas law, corporate directors owe three broad fiduciary duties to the corporation: obedience, loyalty, and due care. See Gearhart, 741 F.2d at 719. However, for over a hundred year - since 1889 - Texas courts have refused to impose liability upon a non-interested corporate director who breached a fiduciary duty unless the challenged action is ultra vires or is tainted by fraud. See: Gearhart, 741 F.2d at 721 (citing Cates v. Sparkman, 73 Tex. 619, 11 S.W. 846 (1889); Robinson v. Bradley, 141 S.W.2d 425 (Tex. Civ. App.--Dallas 1940, no writ); Bounds v. Stephenson, 187 S.W. 1031 (Tex. Civ. App.--Dallas 1916, writ ref'd); Caffall v. Bandera Tel. Co., 136 S.W. 105 (Tex. Civ. App. 1911); Farwell v. Babcock, 27 Tex. Civ. App. 162, 65 S.W. 509 (Tex. Civ. App. 1901)). As the Texas Supreme Court stated, If the acts or things are or may be that which the majority of the company have a right to do, or if they have been done irregularly, negligently, or imprudently, or are within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved, these would not constitute such a breach of duty, however unwise or inexpedient such acts might be, as would authorized interference by the courts at the suit of a shareholder. See Cates, 11 S.W. at 849. This is known as the business judgment rule. See Gearhart, 741 F.2d at 721. Thus, in this case, the first question is whether Butler and Robeau are interested directors. See id. As we stated above, an interested director is one who: (1) makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity; (2) buys or sells assets of the corporation; (3) transacts business in his director's capacity with a second corporation of which he is also a director or significantly financially associated; (4) transacts business in his director's capacity with a family member. See Gearhart, 741 F.2d at 719-20.