A corporation is a legal entity formed for a specific purpose under state law. All corporations have officers and directors responsible for carrying out the business purpose.
In Texas, corporate officers and directors have specific fiduciary duties to shareholders.
Loyalty to the corporation
In carrying forward the corporation’s business, all officers and directors must act in the corporation’s best interest. This means they cannot put their self-interest ahead of the company. A breach of the duty of loyalty usually occurs when an officer or director engages in self-dealing, such as stealing a corporate opportunity or paying a related party for services out of corporate funds.
Obeying the founding documents
Officers and directors must act within the scope of authority as specified in the corporate charter and bylaws. No officer or director can take action on behalf of the corporation if it is not within its designated duties.
Exercise reasonable judgment
When entering into transactions for the corporation, the directors and officers must exercise a duty of care. This means they must make decisions after paying attention to the matter and conducting reasonable due diligence.
If an officer or director makes a simple mistake, the business judgment rule will protect them from liability. This rule recognizes that even sound decisions can lead to erroneous results as a part of the regular risk profile of a corporation.
Serving as an officer or director of a corporation comes with many responsibilities. To avoid liability, people in these positions must know of their duties to shareholders.