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Overcoming the Business Judgment Rule in Texas

The Business Judgment rule allows corporate officers and directors to avoid being held personally liable for business decisions made in good faith with honest motivations, but with unfortunate results. This rule has prevented shareholders from brining derivative suits against officers/directors of a corporation for breaching their fiduciary duty when they make an honest decision that does not pay-off. However, the Business Judgement Rule is not all powerful. In some circumstances it does not apply and even when it does, there are ways to overcome it. This blog is designed to give a brief overview of the Business Judgement Rule and how it can be overcome in Texas.

The Business Judgement Rule was designed to prevent courts from deciding what a rational business decision was by creating a rule that presumes that directors and officers act within their fiduciary duties even if the decision harms the company . However, sometimes the rule does not apply. For example, Texas Courts have held that the Business Judgment Rule does not apply when the directors/officers acted without having "all material information reasonably available to them." Pace v. Jordan, 999 S.W.2d 615, 624 (Tex. App. - Houston [1st Dist.] 1999).

Further, even if the rule does apply, the rule can be overcome if the plaintiff proves that the decision made by the directors/officers was "something beyond unsound business judgment." Id. at 623. The most common way to do this is to show the conduct was "characterized by an ultra vires, fraudulent, and injurious practice, an abuse of power, and an oppression...[and] clearly subversive of the rights of...a shareholder, and which, without such interference, would leave the latter remediless." Id. One of the ways to show this is to prove that the directors were not disinterested parties in the decision, but rather were engaged in self-dealing. Id.

If you are involved in a derivative suit and are concerned about the Business Judgment Rule being used as a defense, do not hesitate to contact Taylor Dunham and Rodriguez LLP for legal assistance.

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