DealLawyers.com Blog

The way that Delaware courts have approached controlling stockholder transactions in recent years has given impetus to the DExit movement. Our readers are well aware of how the Delaware legislature has responded to this challenge, and we’ve also blogged about Nevada’s recent statutory changes designed to enhance controlling stockholders’ protection from liability – but what about Texas?  How does The Lone Star State evaluate the obligations owed by controlling stockholders and what standard applies to judicial review of transactions with them?  This excerpt from a recent Cooley blog provides some insight into these questions:

In the context of a controller transaction, Texas courts apply somewhat of an intermediate approach, focusing on the duty of loyalty in analyzing the propriety of director conduct. To prove a breach of a duty of loyalty, it must be shown that the director was interested in the transaction. Once it is shown that a transaction involves an interested director, the burden is then shifted to the directors to prove the fairness of their actions to the corporation – a heightened review regime more akin to entire fairness than the BJR.

A challenged transaction found to be unfair may nonetheless be upheld if ratified by a majority of disinterested directors or the majority of stockholders. With the recent TBOC amendments codifying the BJR, this heightened legal regime would not apply to a controller transaction in the case of a public company or company that opted into the BJR codification regime and complied with Texas law.

The blog points out that recent amendments to the TBOC also give the board of a public company the right to petition the Texas Business Court to determine the independence and disinterest of directors comprising special committees formed to review transactions with controlling stockholders, directors or officers.

– John Jenkins