Declining an opportunity to weigh in on the Delaware corporate-opportunity doctrine, the Texas Supreme Court instead focused on the common-law remedies for a breach of fiduciary duty. The Court set aside a $95.5 million damages award and a constructive trust because there was no evidence tracing any specific mineral leases acquired by the defendant directors to the conduct the Court assumed to be a breach of fiduciary duty to the company. But because the Court took the path it did, Texas lawyers and lower courts will continue to dispute how to deal with corporate-opportunity claims governed by Delaware law.
Bill Huff and Rick D’Angelo were appointed directors of Longview Energy by a stockholder, The Huff Energy Fund (“HEF”). Bobby Riley and HEF (led by Huff) then formed Riley-Huff Energy. Both Longview and Riley-Huff sought to acquire leases in the Eagle Ford shale, a thirteen-million-acre South Texas oil and gas formation.
According to Longview, Huff agreed to fund any investment approved by Longview’s COO and senior petroleum engineer. After meetings with land brokers, Longview’s management presented a proposal to its board to invest $40 million—funded by Huff—to acquire 20,000 Eagle Ford acres. When D’Angelo informed the board that Huff would not support such an investment, the board did not vote on that proposal, and took no further action on its Eagle Ford plan. Two days before Longview’s board meeting, Riley-Huff had signed a contract with one of the brokers and subsequently acquired 44,698 Eagle Ford acres for its own use. When Longview learned of Riley-Huff’s purchase, it sued Huff, D’Angelo, HEF, and Riley-Huff on several grounds, including breach of fiduciary duty by usurping a corporate opportunity and aiding and abetting. A jury ultimately found for the plaintiff, and the court entered judgment awarding damages of $95.5 million and imposing a constructive trust on various assets held by Riley-Huff.
Defendants appealed to the San Antonio Court of Appeals, arguing the judgment was not supported by legally sufficient evidence. All parties agreed that because Longview is incorporated in Delaware, that state’s law governed the substantive issues. The court of appeals, sitting en banc, therefore undertook a detailed analysis of Delaware’s corporate-opportunity doctrine as applied to the evidence presented. Huff Energy Fund, L.P. v. Longview Energy Co., 482 S.W.3d 184 (Tex. App.—San Antonio 2015). A plurality concluded there was no evidence to satisfy the elements of usurpation of corporate opportunity because Longview did not show it had a cognizable “expectancy interest” in any specific leases. A general desire or strategy to invest in certain types of property does not suffice. Holding Longview had not pleaded a second theory of fiduciary breach—improper competition by the directors—the court reversed and rendered judgment for the defendants.
A lengthy concurring opinion offered a different approach to the corporate-opportunity issues, and opined that Delaware law requires a “two-step analysis” to determine whether a director has breached her fiduciary duty. “The first step,” according to the concurring justice, “requires the factfinder to answer the threshold question of whether the business opportunity in question is actually a ‘corporate’ opportunity.” If that question is answered affirmatively, the factfinder must then “determine if it is equitable for [the] director to take [the] corporate opportunity.” Noting the Delaware Chancery courts do not have juries, the opinion offered an exemplar jury charge by which these issues could be presented in Texas courts. Citing this opinion, a few defendants have submitted similar questions and instructions to Texas trial courts. It’s unclear whether any have been adopted by trial courts, but the issue has not reached the appellate courts.
A likewise lengthy dissenting opinion criticized the court’s analyses and conclusions on both the corporate-opportunity doctrine and pleading of the competition claim. The dissent believed “the record clearly establishes the liability of Huff, D’Angelo, and Riley-Huff.” The dissent nevertheless would have reversed and remanded because it believed “the trial court abused its discretion by disregarding Riley-Huff’s development costs and not limiting the constructive trust to the profits or benefits Riley-Huff obtained as a result of Huff and D’Angelo’s breach of fiduciary duty.”
Longview petitioned for review by the Texas Supreme Court, and the defendants submitted cross issues. The Court side-stepped the liability issues discussed in detail in the three appeals court opinions by “assum[ing], without deciding, that a claim against directors for competing with the corporation without disclosure to or approval by the corporation’s board is viable under Delaware law[;] that the court of appeals erred by holding that Longview’s pleadings were not sufficient to support such a claim[; and] that the evidence is sufficient to support the jury’s finding that Huff and D’Angelo breached both that duty and the duty to not take a corporate opportunity.” Instead, the Court found one of the cross-issues dispositive of both claims—“that there is no evidence tracing Riley-Huff’s acquisition of any specific leases to the breaches.” The Court thus affirmed the San Antonio court’s reversal and rendition of the trial court’s judgment, but for different reasons.
Given that this opinion was issued near the end of the Court’s self-imposed deadline for clearing its docket—a time practitioners usually expect to see more contested holdings—one wonders if this is the one issue on which all the justices agreed.