How Are Fiduciary Duties Applicable to Decisions Authorizing Changes to Corporate Capital?
The first post in this series analyzed whether shareholders may seek remedies in the context of charter amendments to facilitate changes to corporate capital in equity financings. The conclusion was that if an amendment to a corporate charter is properly adopted (and doesn't violate an independent contractual obligation), shareholders can obtain a remedy only if the corporate action can substantiate a claim for breach of fiduciary duty against enough directors or control persons.
In situations where corporations are needy for additional capital, existing and potential stockholders often seek to maximize their potential benefits upon providing investments. They may control the company or control board seats. Some of the actions they take can adversely affect other shareholders' interests. For instance, they may create a senior class of stock with superior right and preferences. Consequently, it is worthwhile to consider when shareholders can claim a breach of fiduciary duty in connection with equity financings or recapitalizations. This part of the series addresses how fiduciary duties of corporate directors and control persons apply in these circumstances in Texas and Delaware.
Directorial Fiduciary Duties in General
Directors owe fiduciary duties to the corporations they serve. In both Delaware and Texas, the two core fiduciary duties are the duty of care and the duty of loyalty. See Mill Acq. Co v. Macmillan, Inc. 559 A.2d 12611, 1280 (Del. 1989) and In re Estate of Poe, 591 S.W.3d 607, 639 (Tex.—El Paso, 2019), rev'd in part on other grounds, 443 S.W.3d 856 (Tex. 2014), (citing Gearheart Industries, Inc. v. Smith Intern., Inc. 741 F.2d 707, 719 (5th Cir. 1984). In Texas, the duty of loyalty has been described as requiring a director to "act in good faith and not to allow his or her personal interests to prevail over the interests of the corporation (also referred to as self-dealing)." In re Estate of Poe, at 63 (citing Gearheart Industries, 741 F.2d at 719). Similarly, Delaware courts have stated the duty of loyalty mandates that directors and in good faith and that "the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder not shared by the stockholders generally." Cede & Co. v. Technicolor, Inc. 634 A.2d 345, 361 (Del. 1993). The duty of care generally "requires a...
