Shareholder Oppression Blog

Ownership interests in a for-profit corporation must be evidenced by a share certificate, unless otherwise provided by the governing documents of the corporation or by resolution of the board of directors. Sec. 3.021(b) (“The ownership interests in a for-profit corporation, real estate investment trust, or professional corporation must be certificated, except to the extent a governing document of the entity or a resolution adopted by the governing authority of the entity provides that some or all of the classes or series of the ownership interests are uncertificated or that some or all of the ownership interests in any class or series of the ownership interests are uncertificated.”). The share certificate has long been held not to be the share of stock itself, but is “the visible representation of it.” Strange v. Houston & T.C.R. Co., 53 Tex. 162, 169 (1880) (“Although the certificate was not the share of stock itself, it was what the company constituted the visible representation of it; and as between the shareholder and his assignee, the equitable, if not the legal title to the stock, would pass by a transfer of the certificate, and this without it being recorded on the books of the company.”).

It is important to note that “owning stock” does not mean possessing a stock certificate. Texas law has long held that the certificate is not the “stock.” Yeaman, 167 S.W. at 720 (“In a corporation the certificate of stock is not the stock itself”). The certificate is merely evidence of the ownership of the stock. Id. (stating that the share certificate “is but a muniment of title, an evidence of the ownership of the stock.”); Greenspun v. Greenspun, 194 S.W.2d 134, 137 (Tex. Civ. App.—Fort Worth 1946), aff’d, 198 S.W.2d 82 (Tex. 1946) (“In this latter connection it is to be remembered that the certificates of stock are not in themselves property, but are only evidence of the interest of the stockholder in the corporation.”); A. B. Frank Co. v. Latham, 190 S.W.2d 739, 741 (Tex. Civ. App.—Austin 1945), aff’d, 193 S.W.2d 671 (Tex. 1946) (“Nor does mere cancellation of the stock certificates effect a reduction of the capital. They are but evidences in the hands of the holder of his aliquot part of the legal capital of the corporation.”). See also Dewing, 96 U.S. at 196 (“The stock of such corporations may be held by a valid title without a certificate. The certificate is only one of the indicia of title. The right to the stock is in the nature of a non-negotiable chose in action.”).

A stockholder owns the stock whether or not he possesses the certificate and regardless of whether a certificate was ever even issued. Yeaman, 167 S.W. at 720 (Possession of a stock certificate “is not necessary to a subscriber’s complete ownership of the stock.”); Greenspun, 194 S.W.2d at 137 (“It is possible under some circumstances for one to own stock in a corporation though no certificate has been issued to him or endorsed or delivered to him, and likewise it is possible under some circumstances for title to the stock to pass without delivery of the certificate of stock or without written assignment of it.”); Estate of Bridges v. Mosebrook, 662 S.W.2d 161, 121 (Tex. App.—Fort Worth 1983, writ denied); Estate of Crawford, 795 S.W.2d 835, 838 (Tex. App.—Amarillo 1990, no writ) (“Complete ownership of certificated stock may exist without the issuance of a certificate or its delivery.”). “The certificate is simply the evidence in the hand of the subscriber on which he may be able to base an assertion of interest in the common fund. However, the title to the certificate may not carry with it title to the stock.” Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. 831, 832 (Tex. Comm'n App. 1919, jmt adopted).

Form and Validity of Certificates

A share certificate must state on the front of the certificate (1) that it represents shares in a Texas corporation, (2) the name of the person to whom the shares were issued, (3) the number and class of shares and series designation, if any, and (4) the par value of each share or a statement that the shares are without par value. Sec. 3.202(c) The certificate may contain an impression of the corporate seal, if any, or a facsimile of the seal may be printed or lithographed on the certificate. Sec. 3.202(a). A share certificate may not be issued in bearer form. Sec. 3.202(f) The certificate must be signed by an officer of the corporation, Sec. 3.203(a); however, a preprinted certificate signed with a facsimile image of a former officer no longer with the corporation at the time the certificate is issued is still valid. Sec. 3.203(b).

Is a shareholder’s right to inspect corporate documents an “internal affair” of the corporation? If so, then the law of the state of incorporation applies. If not, then the law of the forum state applies. As explained in the first part of this blog, the case of Hartman Income REIT, Inc. v. MacKenzie Blue Ridge Fund III, LP, No 01-20-00218-CV, currently pending before the Texas First Court of Appeals, presents precisely this issue. Hartman is a Real Estate Investment Trust, incorporated in Maryland, but headquartered in Texas and with all its operations in Texas. MacKenzie is a Hartman shareholder who demanded to inspect the Hartman shareholder list. Under Maryland law, MacKenzie would not be permitted to see the list, but under Texas law, MacKenzie would be entitled to see the list. Part One of this blog presented MacKenzie’s position that shareholder inspection rights are a judicially-created exception to the internal affairs doctrine based on out-of-state authority that MacKenzie urged the Texas courts to follow.

This Part of the blog presents Hartman’s argument that Maryland law applies because shareholder inspection rights are an internal affair of the corporation.

Texas applies the internal affairs doctrine to corporate governance matters. Harman starts with the proposition that Texas applies the internal affairs doctrine to determine whether Texas law or the law of the state of incorporation applies to foreign corporations in Texas courts. See Hollis v. Hill, 232 F.3d 460, 464–65 (5th Cir. 2000) (applying Nevada law to “determine existence and scope of duties between Hollis and Hill.”); U.S. Bank Nat’l Assoc. v. Verizon Commc’ns, Inc., Civ. Action No. 3:10-CV-1843-G, 2012 WL 12885084, at *19 (N.D. Tex. Sept. 14, 2012) (applying Delaware law to promoter liability and breach of fiduciary duty claims); MatlinPatterson Global Opportunities Partners, LP v. Deutsche Bank Secs., Inc., No. 09-13-00070, 2014 WL 2050237, at *4 (Tex. App.—Beaumont May 15, 2014, pet. denied) (mem. op.) (applying Delaware law to determine whether shareholder’s fraud claim was derivative); Highland Crusader Offshore Partners, LP v. Andrews & Kurth, LLP, 248 S.W.3d 887, 890, 890 n.4 (Tex. App.—Dallas 2008, no pet.) (applying Delaware law to shareholder voting rights): Warren v. Warren Equip. Co., 189 S.W.3d 324, 329–33 (Tex. App.—Eastland 2006, no pet.) (applying Delaware law to breach of fiduciary duty, shareholder oppression, and short form merger claims).

Texas courts have not explicitly ruled that a shareholder inspection demand comes under the ambit of internal affairs; however, in reviewing the statutory definition, it certainly must. The statute defines internal affairs as “matters relating to its membership or ownership interests.” Tex. Bus. Orgs. Code § 1.105(1) These issues are “peculiar to corporations, that is, those activities concerning the relationships . . . of the corporation, its shareholders, officers, and shareholders.” McDermott Inc. v. Lewis, 531 A.2d 206, 215 (Del. 1987). A shareholder’s inspection demand inherently relates to the shareholder’s ownership interests in the corporation. Johnson Ranch Royalty v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d). The Texas internal affairs doctrine governs the “rights … of … owners and members.” Bus. Orgs. § 1.105(2). Just as a shareholder’s rights to dividends is subject to the internal affairs doctrine in Texas, then a shareholder’s right to inspect a company’s shareholder list must also be subject to the internal affairs doctrine. See Lopez v. State Farm Mut. Auto. Ins. Co., No. 13-06-276-CV, 2008 WL 2744609, at *5 (Tex. App.—Corpus Christi-Edinburg June 30, 2008, no pet.) (mem. op.).

Public policy supports applying the internal affairs doctrine to foreign corporations. “Every State in this country has enacted laws regulating corporate governance. By prohibiting certain transactions and regulating others, such laws necessarily affect certain aspects of interstate commerce. . . . This beneficial free market system depends at its core upon the fact that a corporation—except in the rarest situations—is organized under, and governed by, the law of a single jurisdiction, traditionally the corporate law of the State of its incorporation.” CTS Corp. v. Dynamics Corp., 481 U.S. 69, 89–90 (1987).

The Amarillo Court of Appeals held in Davis v. Highland Coryell Ranch, LLC, 578 SW3d 242 (Tex. App.—Amarillo 2019, pet. filed), that a former member of an LLC has the right to inspect books and records if the member has a proper purpose. Highland filed a Petition for Review in September 2019.

Mark Davis was one of Highland Coryell Ranch’s original members. Id. at 245. He relinquished his interest in the Ranch in 2005. Davis requested documents from the LLC after he was no longer a member. Some information was provided; other information was not. Davis sued the Ranch to obtain the remaining information. The Ranch moved for summary judgment based on the argument that Davis had no right to the information, as he was no longer a member of the LLC. Id.

The court first examined the LLC inspection statute, Texas Business & Organizations Code § 101.502(a), which allows a “member of a limited liability company or an assignee of a membership interest on written request and for a proper purpose” to examine certain business records. Id.

The court also examined the definition of member in section 1.002(53)(A) of the Code: “a person who is a member or has been admitted as a member in the limited liability company under its governing documents.” Davis was no longer a member and therefore did not fit into the first category of this definition. Id. at 246.

Here is where the interests of fellow grammarians and law review nerds will be peaked. The court “harken[ed] back to high school English” and examined the tense of “has been” as used in the statute. Id. “Has been” was categorized as the “present perfect tense of the verb ‘to be.’” Id. Several examples of how present perfect tense is used are given, but the key example is that is may “describe a past action that simply occurred at some time or another without continuing effect.” Id. “’[H]as been admitted as a member’ of a limited liability company could mean that the person was admitted at some time or another in the past without requiring that his status as a member continues.” Id.