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Texas Shareholder Law Resources
Overview
I. Shareholder Inspection Rights
Shareholders in a Texas close corporation have the same inspection rights as those in an ordinary Texas corporation. See Tex. Bus. Corp. Act Ann. art. 2.44(C) (Vernon 2003). In order to have standing to exercise those rights, the person seeking inspection must have been a shareholder of the corporation “for at least six months immediately preceding the holder’s demand, or a holder of at least five percent of all the outstanding shares of a corporation.” Id. However, upon a showing of proper purpose by a record shareholder, the court may require a corporation to turn over its books and records for examination and copying regardless of whether the standing requirements of period or percentage of ownership are met. Id. at art. 2.44(E). A shareholder with standing to inspect must make a written demand on the corporation and state a proper purpose for the inspection. Id. at art. 2.44(C). After an appropriate demand, the requesting shareholder, his agent, accountant or attorney may “examine and copy, at a reasonable time, the corporation’s relevant books, records of account, minutes, and share transfer records.” Id.
If a corporation fails to allow a properly demanded inspection, it is liable for costs, expenses and attorneys’ fees associated with the shareholder’s enforcement of his inspection rights. Id. at art. 2.44(D). However, a corporation sued for failing to permit an inspection has several defenses including that the suing shareholder has: within the past two years sold or offered for sale a list of shareholders in return for shares of any corporation, “aided or abetted” someone in obtaining and selling a list of shareholders, improperly used information gained from a previous inspection of a corporation’s books and records, or was not acting “in good faith or for a proper purpose” in demanding the inspection. Id. A director has the right to examine corporate books and records “for any purpose reasonably related to the director’s service as director.” Id. at art. 2.44(B). Inspection rights should carefully be considered during the formation of a close corporation in light of the differences between close and ordinary corporations. F. Hodge O’Neal et al., Close Corporations and LLCs: Law and Practice § 3:45 (3rd ed. 2009). Information regarding a close corporation is not generally disclosed publicly to the same extent as in ordinary corporations. Id. That fact coupled with the unique expectations of shareholders and their relationships between each other and with the corporation mean greater inspection rights are often desirable. Id. To that end, shareholders in a close corporation may enter into a shareholders’ agreement providing for expanded inspection rights. See Tex. Bus. Corp. Act Ann. art. 12.32 (Vernon 2003).
II. Shareholder Oppression
Texas courts have recognized a cause of action based on shareholder oppression in close corporations. See Redmon v. Griffith, 202 S.W.3d 225 (Tex.App.–Tyler 2006, no pet.). In determining whether minority oppression has occurred, the court must balance the “reasonable expectations” of the minority shareholder with the corporation’s “need to exercise its business judgment and run its business efficiently.” Willis v. Bydalek, 997 S.W.2d 798, 801 (Tex.App.–Houston [1st Dist.] 1999, pet. denied).
Oppressive conduct has been defined in Texas as:
1.“Majority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to join the venture; or
2.Burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely.” Redmon, 202 S.W.3d at 236.
Remedies for shareholder oppression in Texas include appointment of a receiver and other equitable remedies including a “buy-out” of the oppressed shareholder where “less harsh remedies are inadequate to protect the rights of the parties.” Tex. Bus. Corp. Act Ann. art. 7.05 (Vernon 2003); Davis v. Sheerin, 754 S.W.2d 375, 380 (Tex.App.–Houston [1st Dist. 1988, no pet.).
Shareholders in Texas close corporations do not, as a matter of law, owe fiduciary duties to each other although such duties may exist depending on the circumstances. Willis v. Donnelly, 118 S.W.3d 10, 31 (Tex.App.–Houston [14th Dist.] 2003, no pet.). However, “a fiduciary relationship is an extraordinary one and will not be created lightly.” Hoggett v. Brown, 971 S.W.2d. 472, 488 (Tex.App.–Houston [14th Dist.] 1997 pet. denied). For example, fiduciary duties between shareholders exist where there is a confidential or informal relationship and they may also be created by contract or through the repurchase of stock. Id. at 31. Furthermore, fiduciary duties may be owed where a majority shareholder dominates control over the business and where shareholders conduct their business more as partners than in formal compliance with corporate formalities. Id. at 32.
III. Derivative Suits
Derivative shareholder litigation in the close corporation context in Texas differs from that involving an ordinary corporation in some situations. Where a close corporation has fewer than 35 shareholders and its shares are not “listed on a national securities exchange or regularly quoted in an over-the-counter market by a national security association, the derivative rules applicable to ordinary corporations do not apply. Tex. Bus. Corp. Act Ann. art. 5.14(I) (Vernon 2003). Instead, “if justice requires,” the derivative action may be treated as a direct action by the shareholder for the shareholder’s own benefit and any recovery obtained may be paid “directly to the plaintiff or to the corporation if necessary to protect the interests of creditors or other shareholders of the corporation.” Id.
If the requirements for a direct derivative action outlined above are not met, several additional prerequisites must be satisfied in order for a shareholder to bring a derivative suit. Initially, a suing shareholder must have standing in that he was a shareholder at the time the cause of action arose or received the shares by operation of law from someone who was a shareholder at the time it arose. Id. at art. 5.14(B). A shareholder must then make a written demand on the corporation stating particularly the events giving rise to the cause of action and requesting that the corporation act accordingly. Id. at art. 5.14(C). The shareholder is then prohibited from bringing a derivative action until 90 days have passed after the demand was made unless the shareholder is notified that the demand has been rejected by the corporation, the corporation is suffering irreparable injury, or waiting the full 90 day period would cause irreparable injury to the corporation. Id. After a demand has been received a determination whether to act on the allegations contained therein is made by a majority of the disinterested and independent directors, a committee thereof or a panel of independent and disinterested persons. Id. at art. 5.14(H). Any derivative proceeding is then stayed while the corporation investigates the demand provided it agrees to inform the court and the shareholder of its findings. Id at art. 5.14(D). Furthermore, the demand filed with the corporation tolls the limitations period on the claim that is the subject of the demand until the earlier of the 91st day after the demand is made or the 31st day after the corporation rejects the demand or completes its review of the matter. Id. at art. 5.14(E).A shareholder who pursues a derivative action after his demand is rejected must show with particularity why the rejection was improper. Id. at art. 5.14(G). A derivative proceeding that is later commenced must be dismissed by the court on a motion of the corporation if those reviewing the demand on behalf of the corporation conclude in good faith and after reasonable inquiry that further pursuit of the matter is not in the best interests of the corporation. Id. at art. 5.14(F).
- See more at: http://www.shareholderoppression.com/resource-news.html?a_id=60#sthash.gacdI9hF.dpuf






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