Officer Part 1

Avoiding the Fiduciary Duty as an Officer of a Company, Part 1

A fiduciary duty is a legal duty to act solely in another party’s interest.  Officer Part 1Parties owing this duty are called fiduciaries.  The individuals to whom they owe a duty are called principals or beneficiaries. Fiduciaries may not profit from their relationship with their principals/beneficiaries unless they have their express informed consent.  The fiduciary relationship encompasses the idea of faith and confidence and arises usually when one person gives the confidence and another person actually and affirmatively accepts it.  Oftentimes, a lawyer trained in fiduciary duty law is the best person to consult with in order to determine whether a fiduciary relationship has arisen.

There are, however, certain relationships that are universally regarded as fiduciary.  These relationships include individuals such as escrow agents, formal agents by name, trustees, brokers, corporate directors and officers, lawyers, and CPAs.  There’s good reason for readily recognizing fiduciary duties here – these sorts of professionals are specially situated to take advantage of their clients’ money, their clients’ business opportunities, or their clients’ trust.  Public policy supports labeling specific professionals as fiduciaries, especially when their specialization involves money management or the giving of critical business advice. The end result of this law is that it provides incentive for the principal to enter these relationships by reducing the principal’s risks and chance of abuse by the professional placed in charge of the principal’s affairs.

Statutes often speak to officers’ and directors’ fiduciary duties to their corporations.  The Texas Business Organizations Code (BOC), which governs Texas corporations, does not explicitly define the corporate directors’ fiduciary duties, yet case law recognizes that directors owe the corporation (not the individual shareholder) a duty of obedience, a duty of loyalty, and a duty care. Gearhart Indus, Inc. v. Smith Int’l, Inc., 741 F.2d 707, 719-721 (5th Cir. 1984).  Officers are agents of a corporation and have duties o obedience, care, and loyalty.  See generally Restatment (third) of agency §§ 8.01-8.12 (2006)(dealing with an agent’s duties of loyalty and performance); Restatment (second) of agency §§377-398 (1958) (dealing with an agent’s duties of service, obedience, and loyalty).  Shareholders, on the other hand, even in a closely held corporation, do not owe one another fiduciary duties. See Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App. – Houston [14th Dist.] 1997, pet. denied).

However, there are ways to statutorily modify these duties and liabilities.  For example, the BOC permits the elimination or limitation of liability of a corporate director in the certificate of formation within certain parameters. Tex. Bus. Orgs. Code § 7.001.  Specifically, the statute provides that the certificate of formation of a corporation may limit or eliminate the liability of a director for monetary damages to the corporation or shareholders for an act or omission in the person’s capacity as a director subject to certain exceptions.  The statute does not permit elimination or limitation of liability for:

1) breach of the director’s duty of loyalty;

2) an act or omission not in good faith that constitutes a breach of duty to the corporation or involves intentional misconduct or a knowing violation of the law;

3) a transaction from which the director received an improper benefit, whether or not the benefit resulted from an act within the scope of the director’s duties; or

4) an act or omission for which liability is expressly provided by a statute.

Other ways to modify duties and liabilities of corporate officers include renunciation of corporation opportunity (Tex. Bus. Orgs. Code § 2.101(21)), shareholder agreements, and indemnification.

Holmes PLLC is a law firm that specializes in fiduciary duty work, including the creation of fiduciary relationships or litigation about them.  The firm frequently advises its clients on the nature and existence of fiduciary duties, and on whether such duties affect their business interests.

The information presented at this site and by this firm should not be understood to be formal legal advice, nor the formation of an attorney-client relationship.