Do Directors Owe an Informal Fiduciary Duty to Shareholders?

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Do Directors Owe an Informal Fiduciary Duty to Shareholders?

A recent decision by the Texas Supreme Court questions whether directors owe an informal fiduciary duty to shareholders. The case, Estate of Poe, No. 20-0178 (Tex. June 17, 2022), explores a transaction made by a closely held corporation’s sole director shortly before his death. Your fiduciary requirements in a small, family corporation can be difficult to parse, so it’s important to note any Supreme Court insight into these duties.

Facts of the Estate of Poe Case

In this case, the sole director of a closely held corporation made an important transaction before he died. Dick Poe’s corporation was a family-run company controlling several car dealerships. Only a few weeks before Dick’s death, he authorized the corporation to release new shares. He then purchased the shares himself for $3.2 million. The purchase made Dick the majority shareholder of the corporation. The corporation’s only other shareholder was Dick’s son Richard. Because of Dick’s actions, his death gave control of the car dealership business to the executors of Dick’s estate, not Richard. Richard didn’t know about the share issuance and purchase until after Dick’s death.

When Richard learned about Dick’s actions, he filed a lawsuit against Dick’s estate. The lawsuit alleged that the share issuance was a self-dealing transaction that violated director Dick’s fiduciary duties to the corporation. It also alleged that the issuance violated a fiduciary duty that Dick owed to Richard because of a “confidential relationship” between them. Finally, the lawsuit claimed that Dick lacked the mental capacity to conduct the transaction. Richard argued that Dick’s business associates took advantage of him in the last days of his life to take control of the corporation away from Richard.

In response, the estate’s executors argued that Dick did not have a fiduciary duty to act in Richard’s best interest. Instead, Dick’s duty as a director was to exercise his best business judgment for the corporation’s sole benefit. They also argued that the share issuance was fair to the corporation. The executors argued that Dick had expressed concerns about Richard’s ability to manage the corporation after Dick’s death.

Ruling: Directors Have No “Informal” Fiduciary Duty to Shareholders

At trial, the probate court presented four questions to the jury. The executors objected to three of them on the grounds that a “confidential relationship” between Dick and Richard did not create an “informal” fiduciary duty for Dick to manage the corporation in shareholder Richard’s interest. Despite the objections, the jury found in Richard’s favor. Both Richard and the executors appealed. After the appeals court altered the trial court’s rulings, both parties again appealed to the Texas Supreme Court.

The Court’s opinion acknowledges that Texas law recognizes an “informal” fiduciary duty when two parties have a confidential relationship with each other. However, the Court has never recognized such a duty between a corporation’s director and its shareholder. Nor, the opinion says, would it recognize such a relationship lightly, given the importance of fiduciary duties. In a corporation, directors already have a fiduciary duty to exercise business judgment to solely benefit the corporation.

The opinion emphasizes that Texas law does not obligate a director to act in a way that would suit an individual shareholder, when the shareholder’s interests don’t align with the corporation’s interests. As a result, the Court ruled that the jury instructions regarding the “informal” fiduciary duty were improper and reversed the judgment.

Why Should Estate of Poe Matter to You?

If you are a director, officer, or shareholder in a corporation, the opinion in Estate of Poe could affect you. The Texas Supreme Court makes clear in the opinion that directors’ fiduciary duty is owed to the corporation, not to the shareholders. Directors have no requirement to “help” shareholders by making decisions in the shareholders’ favor if the decisions would not further corporate interests. They must exercise their business judgment in favor of the corporation’s sole benefit when conducting corporate business. In other words, the corporation’s interests always come first.

Small business owners should take note of this decision moving forward. If your corporation has only a few directors and shareholders, it’s only too easy to make decisions that don’t benefit the corporation. Instead, directors should always act in the corporation’s best interests. If you need advice on running a corporation, exercising business judgment, or compliance with decisions like Estate of Poe, reach out to a business lawyer. Henke, Williams & Boll’s team of trusted attorneys can advise you on important corporate legal issues.

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