What Texas Law Says About Director and Officer Liabilities

In Texas, legal protections and duties concerning directors and officers of corporations are primarily governed by the Texas Business Organizations Code (TBOC). Understanding these regulations is crucial for anyone involved in corporate governance, as they outline the liabilities that can arise and the defenses available to protect individuals serving in these roles.

The TBOC offers a framework that encourages responsible corporate behavior while providing a degree of protection for directors and officers, so long as they act within their authority and in good faith. Governed by the principles of duty of care and duty of loyalty, Texas law stipulates that directors and officers must exercise their decision-making responsibilities with the same care an ordinarily prudent person would exercise in a similar position.

Duty of Care: This duty requires directors and officers to make informed decisions by diligently evaluating information and considering all available options. A breach of this duty can occur if a director or officer fails to do their homework—such as neglecting due diligence in financial matters or corporate transactions—ultimately leading to adverse outcomes for shareholders and the corporation.

Duty of Loyalty: Under Texas law, the duty of loyalty mandates that directors and officers act in the best interest of the corporation rather than their personal interests. Conflicts of interest must be disclosed, and self-dealing transactions must be handled with transparency to avoid liability.

Another critical element of Texas corporate law is the concept of indemnification. The TBOC allows corporations to indemnify directors and officers against expenses incurred as a result of lawsuits or legal actions brought against them for actions taken while serving in their corporate roles. This protection is particularly important as it provides a safety net against personal financial loss, encouraging qualified individuals to step into these roles.

However, indemnification is not limitless. Texas law specifies that a corporation cannot indemnify an individual who is found to have breached their duty of loyalty or who received an improper benefit, or who acted recklessly. Furthermore, corporations may purchase insurance to cover liabilities incurred from actions as a director or officer, providing an additional layer of financial protection.

It is essential for directors and officers to be aware of the business judgment rule, a legal principle that protects them from liability for decisions made in good faith and with reasonable care, even if those decisions lead to negative outcomes. This rule presumes that directors and officers act in the best interests of the corporation, thus allowing them the freedom to make business decisions without the fear of facing legal consequences, provided they adhere to their duties effectively.

In summary, Texas law provides a comprehensive framework governing the liabilities of directors and officers, emphasizing the importance of the duty of care and duty of loyalty. By understanding their responsibilities and the protections available to them, directors and officers can navigate the corporate landscape more effectively and safeguard both their interests and those of the corporations they serve.