Under Texas law, when the owners of closely held companies have co-investors, they need to exercise care in managing their business. This need for caution is due in large part to a Texas statute that makes it easier for minority shareholders or minority members of LLC’s (“Minority Owners”) in closely held companies to file derivative lawsuits alleging claims for breach of fiduciary duties against the company’s officers, directors and/or managers (“Control Persons”). See Tex. Bus. Org. Code (“TBOC”) §§ 21.551 and 101.451-463. This derivative Texas statute removes substantial procedural barriers that would otherwise exist for Minority Owners in filing a derivative lawsuit, and it has been the subject of our previous posts. (Read: Shareholder Oppression Claims)
When Minority Owners file derivative claims for breach of fiduciary duties against the company’s Control Persons, however, the Control Persons have significant defenses available to them under Texas law. These “safe harbor” defenses were highlighted in a recent decision by the Austin Court of Appeals, which dismissed most of the shareholders’ claims. See Roels v. Valkenaar, No. 03-19-00502-CV Tex App. Lexis 6684 (Tex. App. – Austin, August 20, 2020, no pet. history). This post reviews the appellate court decision in Roels, and the court’s analysis of the minority shareholders’ claims for breach of fiduciary duty and the available defenses to these claims is helpful for both Control Persons and shareholders to understand.
Elements of Fiduciary Duty Claims
In Roels, the minority shareholders contending that certain of the company’s officers and directors had breached their fiduciary duties to the company by allegedly engaging in interested-director transactions, misusing company resources and failing to pursue a valuable corporate opportunity. The trial court overruled the defendants’ (Governing Persons) motion to dismiss, but the appellate court largely reversed the trial court’s ruling and, for the most part, dismissed the shareholders’ claims. The court’s decision arose in the context of considering a motion to dismiss the Defendants filed under the Texas Citizens Participation Act (“TCPA”). It is not necessary to review the TCPA for our purposes here, however, in focusing on the court’s rulings regarding the shareholders ’breach of fiduciary duty claims and the defenses to those claims. Continue Reading Navigating Safe Harbors: Review of the Protections Provided to Governing Persons by the Texas Interested Party Statute and the Business Judgment Rule