FIDUCIARY DUTIES OF CORPORATE DIRECTORS AND OFFICERS IN TEXAS ∗ Byron F. Egan I. INTRODUCTION.............................................................................................49 II. CORPORATE FIDUCIARY DUTIES GENERALLY ....................................51 A. General Principles ......................................................................................51 B. Applicable Law ..........................................................................................53 C. Fiduciary Duties in Texas Cases ................................................................56 1. Loyalty..................................................................................................57 a. Good Faith......................................................................................57 b. Self-Dealing Transactions ..............................................................57 c. Oversight ........................................................................................58 2. Care ......................................................................................................58 a. Business Judgment Rule; Gross Negligence ..................................58 b. Reliance on Reports........................................................................59 c. Charter Limitations on Director Liability.......................................60 3. Other (obedience) .................................................................................60 D. Fiduciary Duties in Delaware Cases ..........................................................61 1. Loyalty..................................................................................................61 a. Conflicts of Interest ........................................................................61 b. Good Faith......................................................................................62 c. Oversight/Caremark .......................................................................64 d. Candor ............................................................................................78 2. Care ......................................................................................................81 a. Business Judgment Rule; Informed Action; Gross Negligence......81 b. Business Judgment Rule Not Applicable When Board Conflicted .......................................................................................82 c. Inaction...........................................................................................84 d. Reliance on Reports and Records...................................................84 e. Limitation on Director Liability .....................................................84 E. Fiduciary Duties of Officers.......................................................................85 F. Derivative Actions .....................................................................................87 G. Effect of Sarbanes-Oxley Act of 2002 on Common Law Fiduciary Duties .........................................................................................................95 ∗ Copyright © 2009 by Byron F. Egan. All rights reserved. Byron F. Egan is a partner of Jackson Walker L.L.P. in Dallas, Texas. Mr. Egan is a Vice-Chair of the ABA Business Law Section’s Mergers and Acquisitions Committee and former Co-Chair of its Asset Acquisition Agreement Task Force, which published the ABA Model Asset Purchase Agreement with Commentary (2001). He is also a member of the American Law Institute. Mr. Egan is a former Chairman of the Texas Business Law Foundation and is also former Chairman of the Business Law Section of the State Bar of Texas and of that Section’s Corporation Law Committee. The author wishes to acknowledge the contributions of the following in preparing this paper: Michael L. Kaufman, Michael L. Laussade, Monica L. Pace, David P. Hamm, Shakeeb U. Mir, and Robert G. Richardson of Jackson Walker, L.L.P. in Dallas, Texas and Mark A. Morton of Potter Anderson & Corroon LLP in Wilmington, Delaware. 46 TEXAS JOURNAL OF BUSINESS LAW [VOL. 43:1 1. Overview ..............................................................................................95 2. Shareholder Causes of Action ..............................................................96 3. Director Independence..........................................................................97 a. Power to Independent Directors .....................................................97 b. Audit Committee Member Independence.....................................102 c. Nominating Committee Member Independence...........................106 d. Compensation Committee Member Independence.......................107 e. State Law......................................................................................107 4. Compensation.....................................................................................113 a. Prohibition on Loans to Directors or Officers ..............................113 b. Stock Exchange Requirements .....................................................115 c. Fiduciary Duties ...........................................................................115 5. Related Party Transactions .................................................................116 a. Stock Exchanges...........................................................................116 b. Interested Director Transactions—TBOC § 21.418; TBCA Art. 2.35-1; and DGCL § 144.......................................................116 H. Contractual Limitation of Corporate Fiduciary Duties ............................118 1. Limitation of Director Liability..........................................................119 2. Renunciation of Corporate Opportunities...........................................121 3. Interested Director Transactions.........................................................121 III. SHIFTING DUTIES WHEN COMPANY ON PENUMBRA OF INSOLVENCY ...............................................................................................123 A. Insolvency Can Change Relationships.....................................................123 B. When is a Corporation Insolvent or in the Vicinity of Insolvency?.........126 C. Director Liabilities to Creditors ...............................................................128 D. Business Judgment Rule/DGCL § 102(b)(7) During Insolvency.............137 E. Deepening Insolvency..............................................................................140 F. Conflicts of Interest..................................................................................144 G. Fraudulent Transfers ................................................................................144 IV. EXECUTIVE COMPENSATION PROCESS ................................................145 A. Fiduciary Duties.......................................................................................145 B. Specific Cases ..........................................................................................146 1. Walt Disney ........................................................................................146 a. Facts..............................................................................................146 b. May 28, 2003 Chancery Court Opinion .......................................146 c. September 10, 2004 Chancery Court Opinion (Ovitz’ Fiduciary Duties Regarding His Employment Agreement)..........147 d. August 9, 2005 Chancery Court Post Trial Opinion.....................147 e. June 8, 2006 Supreme Court Opinion ..........................................150 2. Integrated Health................................................................................154 3. Sample v. Morgan...............................................................................157 4. Ryan v. Gifford ...................................................................................161 5. In re Tyson Foods, Inc. Consolidated Shareholder Litigation ...........164 6. Desimone v. Barrows..........................................................................169 7. Teachers’ Retirement System of Louisiana v. Aidinoff.......................171 8. Valeant Pharmaceuticals v. Jerney ....................................................171 9. In re Citigroup Inc. Shareholder Derivative Litigation......................174 2009] FIDUCIARY DUTIES OF CORPORATE DIRECTORS AND OFFICERS 47 C. Non-Profit Corporations...........................................................................175 V. STANDARDS OF REVIEW IN M&A TRANSACTIONS ...........................178 A. Texas Standard of Review .......................................................................178 B. Delaware Standard of Review..................................................................179 1. Business Judgment Rule.....................................................................180 2. Enhanced Scrutiny..............................................................................181 a. Defensive Measures......................................................................181 b. Sale of Control..............................................................................182 3. Entire Fairness....................................................................................184 C. Action Without Bright Lines....................................................................184 VI. M&A TRANSACTION PROCESS................................................................185 A. Statutory Framework: Board and Shareholder Action.............................185