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States are racing to overhaul their laws for business entities due to frequent legal showdowns between mercurial founders and disgruntled shareholders. Texas made itself a more attractive legal home for business by enacting Senate Bill 29 and Senate Bill 2411. For Texas entities, these laws refine the standards for managerial liability through changes to the Texas Business Organizations Code (TBOC).
Philip Spencer
While these changes are intended primarily for public companies, they also benefit private companies, which may now choose to cloak managers with additional protections against breach of fiduciary duty claims (for example, breach of the duty of care or the duty of loyalty). Shareholders frequently reach for these weapons to challenge executive compensation, deals with “cozy” counterparties, or corporate strategy.
The changes include a statutory “business judgment rule” that protects corporate directors and officers (“Managerial Officials” in the statute) from mismanagement claims. For adopting private corporations, the rule establishes presumptions that Managerial Officials have carried out official conduct in good faith, on an informed basis, to further the corporation’s interests, and without violating the law or the corporation’s governing documents.
A suing shareholder must disprove one of these presumptions and also show particular facts illustrating the Managerial Official’s conduct involved fraud, intentional misconduct, a knowing violation of law, or acts outside the corporation’s official purpose. Regardless of adoption, the rule doesn’t displace common law protections that Managerial Officials enjoy today. Some businesses will opt to keep the existing Texas business judgment rule with its slightly less generous protections.
If adopted, the new rule also applies to Managerial Officials who transact with the corporation (for example, lease real estate to the corporation) or approve such transactions. The existing business judgment rule would not protect a Managerial Official who benefited from the transaction.
To help an interested transaction satisfy the TBOC’s requirements, a corporation may now also ask the local business court to confirm that the corporation’s approval committee candidates satisfy the TBOC’s standards. However, this accelerated proceeding creates a platform for contesting shareholders.
Effective Sept. 1, corporations may also insulate their officers from certain money damages. This option was previously only available for corporate directors.
LLCs and limited partnerships also received an optional statutory business judgment rule. Separately, the law makes it clear that these entities may fully waive the fiduciary duties themselves (eliminating the possibility of a claim predicated on those duties). This clears a murky interpretive issue in governance lawsuits.
The new laws also:
- Clarify that manager emails, texts, and other electronic communications are generally not corporate books and records (available for shareholder inspection) unless they carry out corporate action;
- Limit a shareholder’s access to corporate books and records when litigation is brewing or pending with the corporation or corporate representatives;
- Protect contractual venue clauses (county and court) and jury trial waivers in governing documents; and
- Refine the approval requirements for mergers, asset sales, and other major transactions.
- Texas courts historically viewed decisions from “the Mother Court of corporate law” as helpful when Texas guidance did not exist, but the new acts now curtail this practice.
After determining the impact on incentives and corporate controls, companies may use these new tools to attract qualified managers and enable confident decision-making.
Philip W. Spencer is a shareholder at Decker Jones, P.C. in the Mergers & Acquisitions and Corporate practice groups.