I. Introduction.

The conduct of corporate directors and officers is subject to particular scrutiny in the context of business combinations (whether friendly or hostile), executive compensation and other affiliated party transactions, allegations of illegal corporate conduct, and corporate insolvency. The high profile stories of how much corporations are paying their executive officers, corporate scandals, bankruptcies and related developments have further focused attention on how directors and officers discharge their duties, and have caused much reexamination of how corporations are governed and how they relate to their shareholders and creditors. Where the government intervenes (by investment or otherwise) or threatens to do so, the scrutiny intensifies, but the courts appear to resolve the controversies by application of traditional principles while recognizing the 800-pound gorilla in the room.

The individuals who serve in leadership roles for corporations are fiduciaries in relation to the corporation and its owners. Troubled times may increase the focus upon the fiduciary and other duties of directors and officers, including their duties of care and loyalty. Increasingly the courts are applying principals articulated in cases involving mergers and acquisitions (“M&A”) to cases involving executive compensation, perhaps because both areas often involve conflicts of interest and self-dealing or because in Delaware, where many of the cases are tried, the same judges are writing significant opinions in both areas. Director and officer fiduciary duties are generally owed to the corporation and its shareholders, but when the corporation is insolvent, the constituencies claiming to be beneficiaries of those duties expand to include the entity’s creditors.

Similar fiduciary principles are applicable to governing persons of a general or limited partnership and a limited liability company (“LLC”). These entities are often referred to as “alternative entities” in recognition that the rights and duties of their owners and governing persons can be modified by contract to greater extent than is permitted in the case of
corporations.

The focus of the Congress of the United States (“U.S.”) on how corporations should be governed following corporate debacles early in the last decade led to the Sarbanes-Oxley Act of 2002 (“SOX”). SOX was intended to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) into law. This sweeping legislation governs not only the financial services industry, but also public companies generally.

While SOX, Dodd-Frank and related changes to SEC rules and stock exchange listing requirements have mandated changes in corporate governance practices, our focus will be on state corporate statutes and common law. Our focus will be in the context of companies organized under the applicable Delaware and Texas statutes.

Prior to January 1, 2006, Texas business corporations were organized under, and many are still governed by, the Texas Business Corporation Act, as amended (the “TBCA”), which was supplemented by the Texas Miscellaneous Corporation Laws Act (the “TMCLA”).  However, corporations formed after January 1, 2006 are organized under and governed by theTexas Business Organization Code (“TBOC”), which was extensively amended in the 82nd Texas Legislature, 2011 Regular Session (the “2011 Texas Legislature Session”). For entities formed before that date, only the ones voluntarily opting into the TBOC were governed by the TBOC until January 1, 2010, after which time all Texas corporations are governed by the TBOC.

However, because until 2010 some Texas for-profit corporations were governed by the TBCA and others by the TBOC and because the substantive principles under both statutes are generally the same, the term “Texas Corporate Statutes” is used herein to refer to the TBOC and the TBCA (as supplemented by the TMCLA) collectively, and the particular differences between the TBCA and the TBOC are referenced as appropriate.

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