Business Law
Landmines to Avoid When Taking Money from Family and Friends
I constantly have clients that open small businesses and they tell me they are using money from friends or family members. I try to warn them about the downside of such arrangements and how to avoid future problems. There are several big mistakes that most people just do not think about in the beginning! However once a problem arises it is usually too late!
Recently I found this great new article that sums it up quite nicely.
Four Landminds to Avoid! by NFIB.com
I do not usually endorse specific businesses but if you are a small business owner you should seriously think about joining an organization called NFIB (“National Federation Of Independent Business”). This organization was formed to bring together small business all over the country and give them a very big voice!
Proper Independent Contractor Classification: The Legal Ramifications
Texas Builder Magazine of the Texas Association of Builders
8/23/2013
by Leslie L. Hunt
Most individuals in the construction industry know someone who has been the target of a wage and hour investigation. One of the common issues evaluated during this type of investigation is whether a company’s “independent contractors” have been properly classified. In other words, can the company prove that its “independent contractors” should not be treated as an employee?
Whether a worker who performs services for another person is an employee or an independent contractor is not always easy to determine. The proper classification is important, however, because the distinction between employee and independent contractor affects legal rights and obligations, including liability for employment taxes, the right to workers’ compensation benefits, the employer’s potential liability for a workers’ tortious acts, and wage rights such as minimum wage and overtime. Anyone who performs work for a company is presumed to be an employee by the Texas Workforce Commission, the Department of Labor and the Internal Revenue Service (“IRS”). This means a company bears the burden of rebutting this presumption and convincing the governing authorities that a worker is an independent contractor.
Generally speaking, if a company has the right to control what will be done by a worker and how it will be done, an employer-employee relationship exists giving rise to, among other things, wage reporting and tax responsibility. An independent contractor, on the other hand, is self-employed, bears responsibility for his or her own taxes and expenses and is not subject to an employer’s direction and control. Many companies erroneously believe that so long as you give someone a 1099 and call them an independent contractor, that they are properly classified as an independent contractor. However, this is not the way governing authorities view it. Whether a worker is an independent contractor or an employee depends upon much more than what the parties agree to call themselves. It depends on a thorough analysis of the relationship between the individual and the company.
The Supreme Court of Texas has written that the test to determine whether a worker is an employee or an independent contractor is whether the company has the right to control the progress, details and methods of operations of the individual’s work. The company must control not merely the end sought to be accomplished, but also the means and details of its accomplishment as well. Examples given by the Court regarding the type of control normally exercised by an employer include when and where to begin and stop work, the regularity of hours, the amount of time spent on particular aspects of the work, the tools and appliances used to perform the work, and the physical method or manner of accomplishing the end result.[1]
In order for an independent contractor to be properly classified, he/she must truly be independent; therefore, a business must focus on the degree of control versus the degree of independence when determining how to classify a worker. Analyzing the following factors will increase the likelihood of making an accurate determination: (1) instructions given to the worker; (2) training given to the worker; (3) the extent to which the services rendered are an integral part of the principal’s business; (4) any requirement that the services by the worker be rendered personally; (5) the worker’s ability to hire, supervise, and pay assistants; (6) the continuity or permanency of the relationship between the employer and the worker; (7) whether the employer sets hours of work; (8) a requirement to work full-time; (9) the location of the work (on the employer’s premises or at the worker’s home/elsewhere); (10) setting the order or sequence of work; (11) requiring oral or written reports; (12) paying the worker by the hour, week, or month; (13) the payment of the worker’s expenses (business and/or traveling); (14) providing the worker’s tools and materials; (15) significant investment by the worker; (16) the worker’s opportunities for profit or loss; (17) working for more than one business at a time; (18) availability of the worker’s services to the general public; (19) the firm’s ability to discharge the worker; (20) the worker’s right to terminate the relationship; and (21) the amount of the worker’s investment in facilities and equipment.
Governing authorities’ claim that no one factor listed above is weighted a particular way and that there is no magic formula for determining how to classify a worker. In other words, this is a gray area and even a thoughtful analysis offers no guarantees. In cases where businesses want reassurance, the IRS has a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding that can be filed requesting that the IRS review certain facts and circumstances and officially determine a worker’s status. Although it can take at least six months to receive a determination, it is a step that could prove beneficial, especially for businesses that frequently hire the same types of workers to perform particular services.
In the past, it was common for a business to receive notice of an investigation through written correspondence from a governing agency. Today, however, more and more investigators, especially those working for the Department of Labor (“DOL”), are showing up at jobsites unannounced, and requesting to conduct immediate reviews of business records. The information requested during a surprise DOL investigation is likely to be the same as the information requested through a more traditional notice of investigation received through the mail.
If a DOL investigator shows up at your worksite, you can expect to be asked to provide the following items: (1) names, addresses and telephone numbers of all business owners and company officers (e.g. President, Treasurer, Secretary, Board of Directors and other Corporate Officers) along with a company organization chart if one exists; (2) legal name of the company and all other names used by the company (e.g., “Doing Business As” names); (3) records demonstrating your gross annual dollar volume of sales for the past three years; (4) a list of all employees with their address, hourly rate or salary, descriptive job title, shift and whether you consider that employee exempt from overtime for all current and former employees for the investigative period; (5) payroll and time records for the investigative period, including a copy of the last two payroll completed and time records; (6) birth dates for all employees under age 18 who have performed work during the past 24 months; (7) 1099 forms and contract documents with any independent contractors, subcontractors or day laborers; and (8) federal employer identification number.
One of the best ways to prepare your business for a worker classification investigation is to maintain organized records and be able to demonstrate a good faith, reasonable basis for classifying a worker as an independent contractor. Businesses that demonstrate a reasonable basis for its classifications may be relieved from certain monetary consequences depending on which governing authority oversees the investigation.
The IRS recently added an optional program called the Voluntary Classification Settlement Program (VCSP) intended to encourage voluntary compliance with worker classification rules. The VCSP permits employers to prospectively reclassify workers as employees in exchange for limited federal employment tax liability, no interest or penalties, and without an IRS audit or administrative correction procedure.[2] This is something to consider for businesses that become aware that they are currently treating a class of workers as independent contractors but want to voluntarily reclassify the workers as employees going forward.
I am often asked whether it is a good idea for businesses to have contractual agreements with workers designating them as independent contractors. The answer to that question is an unequivocal yes. Using a contract that clearly sets forth the worker’s status as an independent contractor, such as the Texas Association of Builders’ Independent Contractor Base Agreement, can be dispositive of the parties’ relationship, so long as there is no outside evidence contradicting the terms of the contractual provisions. For example, if the contract states the worker will dictate his own hours of performing services, there cannot be evidence that the hours of work were actually controlled by the company. So long as the contractual agreement accurately reflects the independence of the relationship between the company and the worker, it will bolster the likelihood of being able to establish proper classification of the worker as an independent contractor.
Companies can decrease their chances of misclassifying workers in a variety of ways such as (1) routinely reviewing payroll records to determine how many workers are classified as independent contractors and to confirm that a reasonable basis for such classification exists; (2) allowing workers to control the details of a project such as starting and stopping time and the ability to delegate work duties to others individuals under the control of the worker; (3) paying the worker by the project; (4) having worker use his/her own tools or equipment; and (5) avoiding ongoing, continuous relationships with workers.
Companies should strive to maintain a good relationship with their workers. It is important to listen to concerns or questions raised by workers relating to their classification. These questions can often come in the form of questioning whether a worker or class of workers should be receiving overtime pay. If a worker voices concerns over overtime pay, take it seriously and analyze whether that worker is properly classified. If you discover the worker is misclassified and is owed overtime wages, it is advisable to consult with an employment attorney.
Companies should also encourage workers to come discuss any questions or concerns they have about classification or wage issues. Taking this step can prevent a disgruntled worker from filing a complaint with the Texas Workforce Commission or the Department of Labor, which would likely trigger a wage and hour investigation.
Businesses that take a closer look at existing worker classifications and that take proactive steps to comply with state and federal laws are less likely to be found liable for taxes, wages or other damages and penalties down the road.
About the author: Leslie L. Hunt is a shareholder at Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth, Texas. She earned her J.D. from Baylor Law School and her primary practice areas include employment law and business litigation.
Disclaimer: The content of this article is provided for informational purposes only and does not constitute legal advice.
——————————————————————————–
[1] Thompson v. Travelers Indemnity Co. of Rhode Island, 789 S.W.2d 277, 278 (Tex. 1990).
[2] Certain eligibility requirements apply.
The Subpoena Power
November 16, 2012
By Kelly Decker
Texas Family Law and Divorce Blog
There are two types of subpoenas that can command two types of actions. Trial subpoenas command appearance at a trial or hearing and discovery subpoenas command appearance to give testimony for the purpose of discovery of evidence. Either way, the subpoena can also ask for production of documents or tangible items for trial, a hearing or discovery.
The subpoena power can reach beyond the parties in a lawsuit. It can also compel non-parties or entities to comply. Although there are some limits, generally speaking, someone can be compelled to testify or produce documents in a case that they are not directly involved in. For example, Denise Richards could have been subpoenaed in Charlie Sheen’s criminal assault case for his alleged attack on Brooke Mueller. In his suit against Kim Kardashian, Chris Humphries (her 72 day husband) subpoenaed Kanye West (her boyfriend) to appear and give testimony at a deposition, purportedly to show she didn’t intend to marry Chris for legitimate reasons.
Oftentimes, the only way to obtain admissible evidence in a case and prepare for trial is to seek information from third parties using a subpoena. Bank records, computer files, corporate books and records, report cards, medical records, phone records and so forth are good examples. Note: Facebook and other social media sites are protected by federal law from the subpoena power.
Failing to comply with a subpoena could result in contempt charges. The statute allows for a court to assess fines or require the non-appearing party to be confined. Texas Rule of Civil Procedure 176.8.
Kelly Decker practices family law and civil litigation. Ms. Decker specializes in complex divorce cases that require experience and knowledge in real estate, business and probate law. Her background is distinguished by years of trial and appellate experience in real estate, oil & gas, contract and fiduciary duty litigation.
Disclaimer: The content of this article is provided for informational purposes only and does not constitute legal advice.
Understanding the Oil & Gas world – Part II
PART II OF OIL & GAS OUTLINE
DEFINITIONS
Here is Part II of the Oil & Gas Outline provided by the author Derek Fletcher a Managing Director and Wealth Strategist at U.S. Trust, Bank of America Private Wealth Management. I have not altered the context of Mr. Fletcher’s work, however, I have reduced it down to include only the basic information and broken the outline into two separate blogs.
As is the case with many industries, the oil and gas business has adopted a specialized, unique and, in some instances, humorous vocabulary. Below are some of common terms utilized in the oil and gas business:
1. The Players.
a. Landman. A person in the oil and gas industry whose responsibilities include acquiring oil and gas leases, examining and curing titles and managing an oil company’s leases. This term applies to both men and women and it is not advisable to use the terms ‘Landwoman” or “Landperson” !
b. Lessee. The person entitled under a lease to drill and operate oil and gas wells. The lessee will pay the lessor a royalty and retain the balance of the production. The lessee is commonly referred to as the “operator” or “working interest owner.”
c. Mineral interest Owner. The owner of the minerals under a tract of land. The mineral interest owner has the right to extract the minerals or lease that right to another party. The mineral interest owner has a right to bonus payments, delay rentals and royalties.
d. Operator. The working interest owner who is responsible for the daily operations after production has commenced.
e. Purchaser. The company that remits payment to the various interest owners, including the royalty owners and working interest owners.
f. Surface Owner. The owner of the surface estate. While a party can own both the surface and the minerals, the term “surface owner” generally means a person who owns only the surface and none of the minerals.
2. The Economics.
a. Bonus. The consideration paid by the lessee for the execution of an oil and gas lease by a landowner. If the bonus is to be paid out in installments over a number of years, it is referred to as a “deferred bonus.”
b. Carried interest. A fractional interest in oil and gas (usually in the form of a lease) where the owner of such interest has no obligation for the operating costs. Instead, the owners of the remaining fractional interest in the property bear the costs and reimburse themselves out of the production proceeds, if any.
c. Carved Out Interest. An interest created out of a greater interest (e.g., the creation of an overriding royalty interest out of a working interest).
d. Delay Rental. Consideration paid by the lessee to the lessor for the right to delay drilling operations or production during the primary term of the lease.
e. Depletion. The exhaustion of a reservoir (or the reduction in value of the reservoir) caused by the extraction of minerals.
f. Nonparticipating Royalty Interest. A royalty interest which does not “participate” in (i) bonus or rental payments, (ii) the right to execute leases or (iii) the exploration and development. Instead, it entitles the owner to an expense-free interest in any oil and gas if and when produced.
g. Overriding Royalty Interest. This is an interest that is similar to a royalty interest but which is carved out of the working interest of an existing lease. It is commonly expressed as a fraction of production from the lease but is free of exploration and development costs.
h. Production Payment. A production payment is a right to minerals in place that entitles its owner to a specified fraction of production for a limited period of time, or until a specified sum of money or a specific number of units of mineral has been received.
i. Royalty Interest. The interest in production reserved by a mineral interest owner upon entering an oil and gas lease. The royalty is commonly referred to as a fraction of the total production of oil and gas (or the proceeds) and is free of exploration and development costs. Historically, a standard oil and gas royalty was 1/8 – although it now has a range of 1/8 to 1/4.
j. Shut-in Royalty. A payment made when a well that is capable of producing in paying quantities is shut-in due to the lack of an available market. The payments are generally expressed as a particular amount per acre. These payments enable the lessee to keep the lease alive without actual production for a reasonable period of time.
k. Working Interest. Interest under a lease which gives the lessee the exclusive right to explore and develop the property. In exchange for this exclusive right, the lessee must bear all costs associated with such exploration and development.
3. Miscellaneous Terms.
a. Barrel of Oil. 42 U.S. gallons of oil at 60 degrees Fahrenheit weighing approximately 306 pounds. A barrel is the most common unit used for measuring crude oil.
b. Casing. Round steel tubes of varying sizes, weights and grades that can be interconnected into a string. Casing is run into an open borehole and cemented into place. It is the outermost tube in a wellbore and prevents the borehole from caving in.
c. Casinghead Gas. Is basically the gas produced from an oil well. It is a gaseous hydrocarbon which is found in liquid form prior to production but which converts to a gaseous form upon production.
d. Condensate. Liquid hydrocarbon which is found in gaseous form in the formation prior to production but which converts to liquid form upon production. Generally speaking, this is the oil produced from a gas well.
e. Crude Oil. Hydrocarbons found in liquid form in the formation prior to production and remaining in liquid form upon production.
f. Directional Drilling. The drilling of a well that materially departs from vertical drilling (e.g., horizontal drilling).
g. Division Order. A contractual agreement between the party distributing production proceeds and the various interest owners setting out the proportions of production that each owner is entitled to receive. The division order generally requires the payee to stipulate as to the size of the interest involved, warrant title to the same, agree to prove title to the payor’s satisfaction if a dispute arises, indemnify the payor for payments made in accordance with the terms of the division order and other related matters.
h. Dry Hole. A well determined to be incapable of producing in paying quantities.
i. Farmout. An agreement between operators whereby the owner of a lease transfers the development rights (or some portion of it) to another operator in exchange for consideration (often a payment per acre, an overriding royalty interest or a reversionary working interest).
j. Executive Right. The power to make executive decisions regarding the mineral estate, including the power to lease. The executive right can be severed from other incidents of mineral ownership.
k. MCF. Abbreviation for 1,000 cubic feet of gas. MCF is the most common unit used for measuring natural gas.
l. Mud. Drilling fluid which is pumped down the drill pipe through the drill bit and circulated back to the surface. The purpose of this process includes maintaining hydrostatic pressure, lubricating the drill bit, carrying rock cuttings to the surface and preventing the pipe from getting stuck in the borehole.
m. Natural Gas. Hydrocarbon found in gaseous form in the formation prior to production and remaining in gaseous form upon production.
n. Permeability. A measure of the ease (or difficulty) with which a fluid can move through a porous formation (such as shale, sandstone or limestone).
o. Pooling. The joinder of several small tracts for purposes of securing a drilling permit.
p. Porosity. The ratio between the volume of pores within a formation to its total volume. In general terms this is the space in a formation where oil can be held.
q. Primary Term. The period of time during which a lease can be kept alive even though there is no production in paying quantities.
r. Secondary Recovery. Application of various liquids, gasses, heat, etc. at a time in which a reservoir has reached the exhaustion of the natural energy needed to extract the oil.
s. Secondary Term. The period of time during which a lease can be kept alive by virtue of production in paying quantities.
t. Section. An area of one square mile – which equals 640 acres. Sections are divided into quarters – each representing 160 acres.
u. Tertiary Recovery. Use of chemicals or energy to enhance recovery methods for the production of oil or natural gas.
v. Transfer Order. If an interest subject to a division order is transferred, the party distributing production proceeds will require a transfer order to be executed by the transferor and transferee. The transfer order will describe the interest being transferred, the date of the transfer as well as making the transfer subject to the original division order.
w. Tubing. Like casing, tubing is round steel tubes of varying sizes, weights and grades that can be interconnected into a string. Tubing runs inside the casing and is the path through which oil and gas is brought to the surface.
x. Unitization. The joint operation of all or a portion of a producing reservoir often to make secondary recovery operations more economically feasible.
y. Wildcat. An exploratory well that is drilled in an unproven area.
Understanding the Oil & Gas world – Part I
PART I OF OIL & GAS OUTLINE
Do you own oil & gas interest? Many people in Texas have some sort of mineral interest. When you deal with the landman or operator, do you understand all the nuances of the oil & gas world? Many people have a basic understanding, but do not usually have enough information to feel truly knowledgeable. Therefore, I am providing a great outline in two separate blogs for your reading pleasure.
The author of this outline is Derek Fletcher a Managing Director and Wealth Strategist at U.S. Trust, Bank of America Private Wealth Management. I have not altered the context of Mr. Fletcher’s work, however, I have reduced it down to include only the basic information and broken the outline into two separate blogs.
The mineral estate is a tract of land that is distinct from the surface. It includes five primary attributes: (i) the right to explore (ingress & egress), (ii) the right to develop (executive right), (iii) the right to receive bonus payments, (iv) the right to receive delay rentals and (v) the right to receive royalty payments. Accordingly, in the estate planning context, a client may own or be willing to transfer one or more of these various “sticks.”
Steps in the Exploration and Production Process. In order to appreciate oil and gas as an asset, it is important to understand the general activities involved in the exploration and production process.
Step One: The Survey
a. Geological Maps – identifies sedimentary basins and favorable geological locations.
b. Aerial Photography – identifies promising land formations such as faults or anticlines.
c. Magnetic, Gravimetric or Seismic Studies – provides information regarding the various rock strata below the surface.
(1) Magnetic Survey – measures the intensity of the magnetic character of the rock strata.
(2) Gravimetric Survey – measures the variations in gravitational fields.
(3) Seismic Survey – measures the various reflective properties of the rock strata as sound waves are transmitted below the surface. The seismic survey is the most common assessment method.
2. Step Two: Exploratory Drilling
a. Exploratory boreholes are drilled on a promising geological area in order to determine whether, in fact, hydrocarbons exist.
b. Once drilling begins, “mud” is circulated down the borehole and back to the surface. Casing is run into the completed sections of the borehole and cemented into place.
c. When a hydrocarbon formation is found, initial testing is performed to determine the rate flow rates, thickness and internal pressure of the reservoir.
3. Step Three: Appraisal
a. If exploratory drilling produces favorable results, additional wells will be drilled in order to ascertain the size and extent of the field.
b. The economic feasibility of development and production IS determined during the appraisal process.
4. Step Four: Development and Production
a. If commercial quantities of hydrocarbon are discovered, the next step involves development and production from the reservoir.
b. If the field is small, the appraisal wells may simply be used to develop the field.
c. If the field is large, additional production wells may be drilled.
5. Step Five: Enhanced Recovery
a. Many wells are free-flowing – meaning that the underground pressures are sufficient to carry hydrocarbons up the wellbore to the surface.
b. If the underground pressures are insufficient, some fonn of additional lift may be required – such as a pumping mechanism or the injection of gas, water or steam to maintain the necessary pressure.
c. It may also be necessary to stimulate production by fracturing the formation referred to as “fracking.”
6. Step Six: Processing
a. This is the process whereby the fluids produced (oil, gas and water) are separated.
b. Oil must generally be free of dissolved gas.
c. Gas must be stabilized and free of liquids and other elements such as hydrogen sulphide and carbon dioxide.
d. Water must be treated before disposal.
Enforeceable contracts made by email
With today’s electronic world, the issue of whether you can create a binding contract through email signatures often comes up in business. In Texas, the elements that are generally required to create an enforceable contract are (1) an offer; (2) acceptance in strict compliance with terms of the offer; (3) a meeting of the minds with respect to both the subject matter of the agreement and all of its essential terms; (4) a communication that each party has consented to the terms of the agreement; (5) for a written contract, execution and delivery of the contract with an intent that it become mutual and binding on both parties; and (6) consideration (the giving of something of value).
In Texas, a contract may be written or oral, unless the contract is required by law to be in writing. A written contract must spell out the agreement and be signed by both parties. An example of a contract required to be in writing is a settlement agreement in a lawsuit, which must also be signed by the parties and filed with the court to be binding.
The Texas Uniform Electronic Transaction Act allows for electronic signatures to create an agreement. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct. UETA allows for the enforceability of electronic signatures once the parties to a transaction have decided to carry on dealings by electronic means. In Texas, the Courts have consistently held that an email signature is comparable to a manual signature. Therefore, if someone makes an offer to settle a matter with you and you then accept that offer, all by email, then a contract has been created.
A party that agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means. If you no longer want to transact business by electronic means, you just need to notify the other party in writing that you no longer agree to conduct business by email.
If you want to ensure you do not create a contract by email, you might consider putting a disclaimer on your emails that states: “This email is not intended to create or form a contract between the parties”. This may be ineffective if the substantive body of the email contradict and override this statement, so I suggest starting your email out with this language.
How to sue or defend in small claims court.
Have you every been sued or had a need to sue someone else but couldn’t afford an attorney? If the total recover is no more than $10,000, than a Small Claims Court may be just right for you! Then Small Claims Court may be a better alternative than hiring an attorney. Being sued is never a joy and many times it is very overwhelming to the parties. Well there is help to the average person on how to deal with a Small Claims case. There is no need to be worried, as a Justice of Peace Judges are average people who are just deciding who is right or wrong based on the facts presented. So with a little help you can master this Court’s procedure and represent yourself.
The Texas Young Lawyers Association put together a great brochure that helps you understand what to expect in Small Claims Court.
Filing suit in Small Claim’s Court!
If someone owes you money and won’t pay, you don’t have to hire an attorney, instead you could take them to small claims court. In Texas, each County has its own JP Courts that decide cases under $10,000.00. The process is very simple and the JP staff are very helpful.
You will be requested to fill out a civil warrant or a civil summons form which contains space for the details of the claim. Be sure you have the Defendant’s correct address, so the Sheriff’s office can serve them with a copy of the legal papers.
Once a hearing is set and held, you must show up to tell the Court or a Jury your side of the case. The judge will conduct the trial in an informal manner so as to do substantial justice between the parties. The judge will have the discretion to admit all evidence which may be of probative value although not in accordance with formal rules of practice, procedure, pleading or evidence, except that privileged communications shall not be admissible. The object of such trials shall be to determine the rights of the litigants on the merits and to dispense expeditious justice between the parties.
The successful plaintiff in a civil case will in most cases be awarded a money judgment as compensation for the defendant’s wrongful act. The judgment is judicial recognition that the defendant is indebted to the plaintiff for a particular sum of money. The plaintiff is never assured of actually receiving the money, however, since the judgment can only be enforced out of property belonging to the defendant. Remedies to enforce judgments are available, but a defendant in a civil case is not subject to criminal sanctions for failing to pay a money judgment. Good luck!
Did Aubrey McClendon breach his fiduciary duties to Chesapeake shareholders?
Bowing to pressures from their shareholders, Chesapeake Energy Corp.’s directors have forced co-founder and CEO Aubrey McClendon to step down as chair, all over his personal financial dealings, including the taking of up to $1.1 billion in loans against his stakes in Chesapeake oil and gas wells. A Reuters investigation has found, McClendon also ran a lucrative business on the side: a $200 million hedge fund that traded in the same commodities Chesapeake produces. Is such behaviour to be tollerated and is it a breach of McClendon’s fiduciary duties as CEO and Chair of the Board of Directors?
An officer or director of a corporation owes a formal fiduciary relationship to the corporation and shareholders, such as:
a)Duty of Loyalty The duty of loyalty “requires an extreme measure of candor, unselfishness, and good faith on the part of the officer or director.” A corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. An officer or director is considered “interested” when he “makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity.”
b)Duty of Care Texas law imposes on corporate officers and directors a duty to exercise due care in the management of the corporation’s affairs. If they breach that duty, they are liable to the corporation for any loss it may suffer as a result of their neglect.
c)Duty of Full Disclosure The duty of full disclosure on all matters affecting the corporation, including disclosing when the officer or director will personal benefit for contracts or certain actions.
d)Duty of Obedience The duty of obedience “requires a director to avoid committing acts, i.e., acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.”
From first glance it looks as if McClendon did breach his fiduciary duty of Full Disclosure and Loyalty. It will be interesting to see what the shareholders think and whether a class action lawsuit is filed by them.
Understanding Minority Shareholder Oppression
In Texas, a fiduciary duty can arise in two different ways, through a formal relationship or an informal relationship:
1) A formal fiduciary relationship is created where there is a legal duty created by law. In a corporation, officers’ and directors’ owe the following fiduciary duties:
a) Duty of Loyalty The duty of loyalty “requires an extreme measure of candor, unselfishness, and good faith on the part of the officer or director.” A corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. An officer or director is considered “interested” when he “makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity.”
b) Duty of Care Texas law imposes on corporate officers and directors a duty to exercise due care in the management of the corporation’s affairs. If they breach that duty, they are liable to the corporation for any loss it may suffer as a result of their neglect.
c) Duty of Full Disclosure The duty of full disclosure on all matters affecting the corporation, including disclosing when the officer or director will personal benefit for contracts or certain actions.
d) Duty of Obedience The duty of obedience “requires a director to avoid committing acts, i.e., acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.”
2) An informal fiduciary relationship is created where there is a level of reliance between parties. Share ownership does not ordinarily involve any duties to the corporation or other shareholders. In a corporation, majority shareholders may owe a fiduciary duty when the majority shareholder exercises control over the corporation, either directly as an officer, director or through a majority vote or indirectly through control and influence over the officers and directors. The peculiar duties of a controlling stockholder to deal fairly with the corporation, its stockholders, and creditors are broader than the trust-fund doctrine. It rests on his inside knowledge of the corporation’s affairs and his opportunity to manipulate them for his personal advantage. Informal fiduciary duties arise under Texas law “from a confidential relationship ‘where one person trusts in and justifiably relies upon another, whether the relation is moral, social, domestic or merely personal.’”
The Texas Supreme Court and several appellate courts in Texas have yet to recognize a cause of action for shareholder oppression, but suits by minority shareholders are on the rise. Many of these suits deal with the claims of breach of fiduciary duty, but many times they include claims for shareholder oppression. This cause of action may arise when the majority shareholders in a corporation take action that unfairly prejudices the minority, such as refusing to declare dividends, lock the minority out of the corporate office; refuse to allow an inspection of corporate documents.
Texas law does not formally recognize the concept of shareholder oppression, except in the receivership statute that mentions, but does not define, “shareholder oppression” as a ground for receivership. Tex. Bus. Orgs. Code Ann. § 11.404 (Vernon 2010). Regardless, the Texas Court of Appeals has applied this statute outside of the receivership context to create a vague cause of action with poorly-defined parameters sometimes referred to as “shareholder oppression.” Therefore, shareholder oppression becomes a fact issue for the trier of fact and is not created as a matter of law.
So if you are an officer, director or majority shareholder of a Texas corporation and you intend to take actions that may be detrimental to the minority shareholders, you should consult an attorney to ensure it does not constitute a breach of your fiduciary duty or shareholder oppression.
Texas Law Today 