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Stock Conversion

How Business Judgment Rule Cases Apply to Stock Conversion

Business judgment rule cases give broad protection to corporate decisions, even when shareholders are harmed. How do they apply to stock conversion?

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The Business Judgment Rule in Cases of Conversion

The business judgment rule in Texas generally protects corporate officers and directors, who owe fiduciary duties to the corporation, from liability for acts that are within the honest exercise of their business judgment and discretion.

Sneed v. Webre, 465 S.W.3d 169, 173 (Tex. 2015).

The Texas Supreme Court, quoting Cates v. Sparkman, recently stated: "In Texas, the business judgment rule protects corporate officers and directors from being held liable to the corporation for alleged breach of duties based on actions that are negligent, unwise, inexpedient, or imprudent if the actions were 'within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved.'" The business judgment rule is a basic tenent of corporate law, which bars judicial scrutiny of decisions made by the corporation's directors in the exercise of their discretion. The business judgment rule is based on the assumption that judges are in no position to determine the wisdom of substantive business matters and the basic unfairness of criticizing difficult decisions with the benefit of hindsight. The business judgment rule is a defense for directors against claims brought by the corporation or on behalf of the corporation, but the business judgment rule applies only disinterested directors. Directors who engage in self-dealing may not assert the rule.

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Applying Business Judgment Rule Case Law to Conversion

The business judgment rule is a defense to a claim that an officer or director has breached fiduciary duties to the corporation. Unlike the defense of good faith, the business judgment rule is not so much an affirmative defense as a judicial policy not to interfere in the management of corporations and not to scrutinize disinterested management decisions, no matter how imprudent. The rule not apply in a claim by a shareholder against the corporation for impairing vested property rights in the stock. In Sandor Petroleum v. Williams, the court held that the minority shareholder “had a vested property right in the value of his stock.” The conduct of the majority in Sandor constituted conversion because it “depriv[ed] the owner of the full value of his stock.” The court held that the “right of the corporation to regulate and to manage its affairs does not include the power to impair that vested contractual right and to take from holders of unrestricted stock the value of their stock.” Therefore, a corporate defendant in a stock conversion claim would be able to escape liability in certain instances by proving the affirmative defense of good faith.

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