A Director’s Fiduciary Duty to His Corporation

A Director of a Corporation has specific fiduciary duties that precludes activities that might endanger the Corporation. The certificate of formation may limit or eliminate personal liability of Directors in certain respects such as money damages but there are some concrete fiduciary duties that cannot be dispensed with such as:

1. Breach the duty of loyalty;
2. An act or omission not in good faith that constitutes a breach of a duty or involves intentional misconduct or a knowing violation of law;
3. A transaction in which the director received an improper benefit; or
4. An act or omission for which liability of a director is expressly provided by Texas Statute.

Of all the mandatory fiduciary duties listed above, the duty of loyalty is the most sacred. The policy in Texas is that a Director’s loyalty is to the Corporation first and to himself second. A Director is generally precluded from entering into any transaction that may personally benefit him. A Director has a personal interest in a transaction if he is a party to the transaction, has a material financial stake in the transaction, or is an immediate family member to the transaction.

A Director may enter into a transaction with the corporation that personally benefits him with these three exceptions:

1. The material facts of the relationship governing the transaction are known to the board of directors, and the board in good faith authorizes the transaction by a vote of a majority of the disinterested directors;
2. The material facts of the relationship governing the transaction are disclosed to the shareholders who then by vote approve the transaction in good faith; or
3. The transaction is fair to the Corporation at the time it is authorized or ratified by the board of directors or shareholders.

If one of these three exceptions apply to a Director that stands to personally benefit from a transaction with the Corporation, then his fiduciary duty of loyalty will likely not be breached. The duty of loyalty is the most important fiduciary duty because many Corporations have Directors which serve concurrently as Directors for other independent Corporations. It is common to have a Director for a Corporation that is also a Director for another Corporation. With one individual sitting as a Director on multiple Corporations it is important that his duty of loyalty remains consistent with each Corporation that he represents.

Julian Nacol, Attorney   The Nacol Law Firm P.C.  (972) 690-3333