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Can we limit corporate director liability when forming business?

Yes, there are director actions you can limit right in your Texas formation certificate for your corporation. However, there are also actions that you simply cannot exculpate.

As reported by Baylor University School of Law, Texas' Business Organizations Code holds that you can limit or even exclude liability expressly for a for pecuniary damages to the corporation or its shareholders that resulted from the director's action or lack of action as a director. However, all rights to exculpation are not absolute. As per statute, there are some exceptions, which point towards not eliminating such liability if the director's intentions may not have been as pure as they should have been.

No exculpation under certain mindsets

Some non-negotiables include the following:

  • Directors who lack good faith in their action or inaction that is also a breach of a duty to the company, retain liability
  • Directors' liability remains if they breach the duty of loyalty
  • Directors' liability remains if their misconducted action or inaction was intentional
  • Directors' liability remains if their action or inaction involved a knowing violation of law
  • Director's liability remains if he took an inappropriate benefit from a transaction, even if outside his capacity as director

Any liability found specifically and directly by statute may also not be subject to reduction or elimination.

Negligence versus gross negligence question

Thus, generally, the statutory scheme generally allows waiving liability of a director for duty-of-care failures under certain circumstances. Thus, if the standard for violation of a director's duty of care is negligence and nothing more, it would seem that an exculpation clause in a business formation certificate may provide full protection of that director. But what about gross negligent behavior? The Texas court recently found that gross negligence may be subject to exculpation as well as regular level negligence.

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