Nature of the Corporation

Nature of the Corporation

 

What is a corporation? How is it different from a partnership? What are the legal obligations?

 

Attributes of the corporate entity

The corporate structure allows the owners of a business to shield themselves from liability for debts incurred by the business, to securitize their ownership, to separate the ownership and control of a business so as to allow the existence of owners who are purely investors and are not required to manage the affairs of the business, and to make the business structure permanent and not subject to the whims of each of the participants.

 

Legal personhood of the corporate entity

The law regards the corporation as a unique legal person. Tex. Bus. Orgs. Code § 1.002 (69-b) (“‘Person’ means an individual or a corporation, partnership, limited liability company, business trust, trust, association, or other organization, estate, government or governmental subdivision or agency, or other legal entity.”). Other statutes also define a corporation as a person. See Tex. Penal Code Ann. § 1.07(a)(38); Tex. Agric. Code Ann. §§ 13.301, 13.351, 41.002, 92.002, 101.001, 102.152, 132.001, 150.001; Tex. Alco. Bev. Code Ann. § 1.04; Tex. Bus. & Com. Code Ann. § 1.201(b); Tex. Civ. Prac. & Rem. Code § 37.001; Tex. Gov't Code Ann. §§ 305.002, 2001.003; Tex. Health & Safety Code Ann. §§ 144.002, 241.003; Tex. Ins. Code Ann. §§ 83.001, 462.004; Tex. Lab. Code Ann. § 62.002; Tex. Occ. Code Ann. § 953.001; Tex. Water Code Ann. § 361.003; Tex. Civ. Prac. & Rem. Code § 71.001(1). “The great object of an incorporation is to bestow the character and properties of individuality on a collected and changing body of men.” Providence Bank v. Billings, 29 U.S. 514, 524 (1830). See also Wright Hydraulics, Inc. v. Womack Mach. Supply Co., 482 S.W.2d 34, 36 (Tex. Civ. App.—Fort Worth 1972, no writ) (“Since corporations become entities upon incorporation their status before the law is that of individuals (in the ordinary case) despite the fact that one corporation may be the subsidiary of another, or the affiliate of any other, or of others.”); State v. DeSantio, 899 S.W.2d 787, 789 (Tex. App.—El Paso 1995, pet. ref'd) (“A corporation is a legal entity separate from the persons who compose it.”).

“A corporation is a separate legal entity from its shareholders, officers, and directors.” TransPecos Banks v. Strobach, 487 S.W.3d 722, 728 (Tex. App.—El Paso 2016, no pet.). Accord. Grain Dealers Mut. Ins. Co. v. McKee, 943 S.W.2d 455, 458 (Tex. 1997) (“Under Texas law, a corporation is an entity separate from its shareholders. While under certain extraordinary circumstances the corporate fiction may be disregarded, mere control and ownership of all the stock of a corporation is not a sufficient basis for ignoring the distinction between the shareholder and the corporate entity.”); Waddill v. Phi Gamma Delta Fraternity Lambda Tau Chapter Texas Tech Univ., 114 S.W.3d 136, 141 (Tex. App.—Austin 2003, no pet.) (“A corporation—whether for-profit or not-for-profit—is a distinct legal entity which comes into existence by charter from the state.”); Dennis v. Smith, 49 S.W.2d 909, 910 (Tex. Civ. App.—Waco 1932, no writ) (“The corporation is a distinct person in law from each of its stockholders.”); Washington DC Party Shuttle, LLC v. IGuide Tours, 406 S.W.3d 723, 738–39 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) (“Under Texas law, a corporation is presumed to be a separate entity from its officers and shareholders.”); Doyle v. Kontemporary Builders, Inc., 370 S.W.3d 448, 457 (Tex. App.—Dallas 2012, pet. denied) (“Corporations are separate legal entities from their shareholders, officers, and directors.”); Penhollow Custom Homes, LLC v. Kim, 320 S.W.3d 366, 372 (Tex. App.—El Paso 2010, no pet.) (“A corporation is a separate legal entity from its shareholders, officers, and directors.”)

This rule applies to corporations entirely owned by a single individual, or to a wholly-owned subsidiary of another corporation, see Lenoir v. U.T. Physicians, 491 S.W.3d 68, 88 (Tex. App.—Houston [1st Dist.] 2016, pet. filed), even in instances where one may dominate or control, or may even treat one corporation as a mere department, instrumentality, or agency of the owner. Valero S. Tex. Processing Co. v. Starr Cty. Appraisal Dist., 954 S.W.2d 863, 866 (Tex.App.–San Antonio 1997, pet. denied). However, when an entity insulates itself legally from a related entity, that action is accompanied with legal benefits and potential burdens. One cannot demand differentiation in one context yet benefit from blurred lines in another. Lenoir v. U.T. Physicians, 491 S.W.3d at 88.

 

Perpetual duration

A corporation exists perpetually unless the certificate of formation provides otherwise. Sec. 3.003 (“DURATION. A domestic entity exists perpetually unless otherwise provided in the governing documents of the entity. A domestic entity may be terminated in accordance with this code or the Tax Code.”). This characteristic distinguishes corporations from partnerships, where the decision by one partner to leave the venture triggers winding up of the partnership. See Gregan v. Kelly, 355 S.W.3d 223, 230 (Tex. App.—Houston [1st Dist.] 2011, no pet.). Perpetual existence provides stability to corporations and allows corporations to act as independent legal persons transcending their current owners. 20 Tex. Prac., Business Organizations § 30:1 (3d ed.). Corporate existence is also difficult to terminate—requiring board approval and a two-thirds shareholder vote. See Tex. Bus. Orgs. Code Ann. §§ 21.364(b), 21.502(3)(A)(i), 21.503(b).

 

Separation of ownership and control

Unlike a partnership, in which the owners directly control the business, owners of a corporation do not directly control the corporation; rather, corporations are managed by directors, who are elected by the shareholders. See TEX. BUS. ORGS. CODE ANN. § 21.401(a)(2) (West 2013) (“The board of directors of a corporation shall . . . direct the management of the business and affairs of the corporation.”). See 20 Tex. Prac., Bus. Orgs. § 30:1 (“Shareholders elect directors who then have the responsibility for managing the corporation’s affairs. Once the directors are elected, shareholders have little say in management other than to vote on certain fundamental transactions.”); id. § 30:2 (“A shareholder, as such, has little right to participate in management, save the right to elect directors, and vote on fundamental transactions.”). “A principal economic function of corporate organization is separation of ownership from control, so that entrepreneurs need not supply all the capital, and those who supply capital may diversify their investments and need not furnish managerial skills.” Hoagland ex rel. Midwest Transit, Inc. v. Sandberg, Phoenix & von Gontard, P.C., 385 F.3d 737, 747 (7th Cir. 2004). The corporate structure allows those with operations talent to manage and those with capital perform the investment function. 20 Tex. Prac., Bus. Orgs. § 30:1

 

Separate legal person

A corporation is a separate legal person, distinct from the shareholders. See Graham v. La Crosse & M.R. Co., 102 U.S. 148, 160–61 (1880) (“A corporation is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true; but, in law, it is as distinct a being as an individual is, and is entitled to hold property (if not contrary to its charter) as absolutely as an individual can hold it.”); Trustees of Dartmouth Coll. v. Woodward, 17 U.S. 518, 636 (1819) (“A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.”); TransPecos Banks v. Strobach, No. 08-14-00059-CV, 2016 WL 1169139, at *4 (Tex. App.—El Paso Mar. 23, 2016, pet. filed) (“A corporation is a separate legal entity from its shareholders, officers, and directors.”); Penhollow Custom Homes, LLC v. Kim, 320 S.W.3d 366, 372 (Tex. App.—El Paso 2010, no pet.) (“A corporation is a separate legal entity from its shareholders, officers, and directors”). “Property owned by a corporation is property of the separate corporate entity and not that of the shareholders.” State v. DeSantio, 899 S.W.2d 787, 789 (Tex. App.—El Paso 1995, pet. ref'd).

 

Centralized Management

Texas law presumes a model of corporate management based on a board of directors as the decision-making authority. Shareholders elect directors who “direct the management of the business and affairs of the corporation” without direct input by the shareholders. Tex. Bus. Orgs. Code § 21.401. Typically, directors delegate day to day operations to officers and employees, who operate under the overall supervision of the board.

Yet, the directors are not representatives in the political sense, doing the will of the electorate. The institution and power of the board of directors is a creature of statute. Once elected directors are required to use their discretion and business judgment independently. Directors may disregard the desires of a majority of the shareholders and use their own best judgment. Directors may be held accountable for misuse of their power, even if they are attempting to do the will of a majority of the shareholders. The bottom line is that the shareholders do not run the corporation through their elected representatives; rather the shareholder select the persons who will manage the business for them. If the shareholders are dissatisfied, their only recourse is to elect someone else. See, e.g., Adams v. Farmers Gin Co., 114 S.W.2d 583, 587 (Tex. Civ. App.—Eastland 1938, no writ) (right of management of business of corporation is vested in directors rather than shareholders; remedy of shareholders if they disapprove of management decisions is to elect new directors in prescribed manner at regular time); see also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 959 (Del. 1985) (“If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out.”).

 

Majority Rule

Most decisions, unless otherwise provided in the governing documents, both at the board and shareholder level are made by majority vote. Therefore, whoever controls the majority of the shares, controls who runs the company. And whoever controls a majority of the seats on the board, actually controls the company. In most smaller corporations, a shareholder may only own 51% of the shares, but because of the doctrine of majority rule, that shareholder can place himself in 100% control of 100% of the corporate assets.

 

Limited liability

In a partnership, the individual partners are personally liable for all debts, obligations, and claims against the business. “A fundamental principle of corporate law is that an individual is permitted to incorporate a business and thereby normally shield himself from personal liability for the corporation's contractual obligations.” TransPecos Banks v. Strobach, 487 S.W.3d 722, 728 (Tex. App.—El Paso 2016, no pet.); Singh v. Duane Morris, L.L.P., 338 S.W.3d 176, 182 (Tex. App.—Houston [14th Dist.] 2011, pet. denied) (“A bedrock principle of corporate law is that an individual can incorporate a business and thereby normally shield himself from personal liability for the corporation's contractual obligations.”); Penhollow Custom Homes, LLC v. Kim, 320 S.W.3d 366, 372 (Tex. App.—El Paso 2010, no pet.) (citing Willis v. Donnelly, 199 S.W.3d 262, 271 (Tex. 2006)); Julka v. U.S. Bank Nat'l Ass'n, 01-16-00348-CV, 2017 WL 405814, at *3 (Tex. App.—Houston [1st Dist.] Jan. 31, 2017, no. pet. h.).

Shareholders (including beneficial owners, subscribers and their affiliates) may not be held personally liable for the debts or obligations of the corporation. Tex. Bus. Orgs. Code § 21.223(a) This immunity from liability is absolute and preempts every other basis for liability under the common law or otherwise. Sec. 21.224. There are three very limited exceptions: (1) where the law permits a court to “pierce the corporate veil” as a result of the shareholder’s use of the corporation to perpetrate an actual fraud, Sec. 21.223(b), (2) where the shareholder expressly assumes, guarantees, or agrees to be liable for a corporate obligation, Sec. 21.225(1), or (3) where the shareholder is personally liable based on a violation of his own duties imposed by the Code or other law. Sec 21.225(2). With respect to his own shares, a shareholder is absolutely immune from liability to the corporation and its creditors, other than for full payment of any unpaid consideration still owed on the shares. Sec. 21.223. Shareholders have less protection against piercing the corporate veil with regard to tort liability than they do with regard to contractual liability and debts.

 

Free transferability of ownership

Ownership interests in a corporation are divided into shares, usually represented by share certificates. Shares are freely transferable, see Tex. Bus. Orgs. Code Ann. § 21.209, unless enforceable restrictions have been put into place in advance. In a partnership, partners are not required to accept a transferee into the partnership. In a corporation, shareholders normally lack the power to prevent new shareholders from joining the enterprise.

 

Relationship of the corporation to its shareholders

Equitable ownership interest

As such, the shareholders are the equitable owners of corporate property, but the corporation is the legal owner. Sneed v. Webre, 465 S.W.3d 169, 191 (Tex. 2015); Humble Oil & Ref. Co. v. Blankenburg, 235 S.W.2d 891, 894 (Tex. 1951); Aransas Pass Harbor Co. v. Manning, 63 S.W. 627, 629 (Tex. 1901). In Yeaman v. Galveston City Co., the Texas Supreme Court held that a corporation “is a trustee for the interests of its shareholders in its property.” 167 S.W. at 723. “[T]he trusteeship of a corporation for its stockholders is that of an acknowledged and continuing trust. It cannot be regarded of a different character. It arises out of the contractual relation whereby the corporation acquires and holds the stockholder’s investment under express recognition of his right and for a specific purpose. It has all the nature of a direct trust.” Id. See also Graham v. Turner, 472 S.W.2d 831, 836 (Tex. Civ. App.—Waco 1971, no writ); Disco Mach. of Liberal Co. v. Payton, 900 S.W.2d 124, 126 n.2 (Tex. App.—Amarillo 1995, writ denied) (“[T]he relationship of corporation and shareholder is “akin to one of trust” because of “the contractual relation whereby the corporation acquired and held the stockholder’s investment for a specific purpose and under express recognition of his rights accruing in the investment.”). Because the law imposes on the corporation the duties of a trustee, the Court held: “Its possession is friendly, and not adverse, and the shareholder is entitled to rely upon its not attempting to impair his interest.” 167 S.W. at 723. Because the shareholder is the beneficiary of the trust, “[h]e is chargeable with no vigilance to preserve his stock or its fruits from appropriation by the corporation, but may confide in its protection for their security.” Id. The proposition that the legal relationship between a corporation and its shareholders as a particular type of trust has been often repeated, never denied or limited, and is very well established in Texas case law. See Disco Mach. of Liberal Co., 900 S.W.2d at 126 n.2 (“Historically, the relationship between corporation and shareholder was akin to one of trust.”); Hinds v. Sw. Sav. Ass’n of Houston, 562 S.W.2d 4, 5 (Tex. Civ. App.—Beaumont 1977, writ ref’d n.r.e.) (“[T]rusteeship of a corporation for its stockholders is that of an acknowledged and continuing trust . . . .”); Graham, 472 S.W.2d at 836 (“the relation of a corporation to its stockholders is that of a trustee of a direct trust.”); Rex Ref. Co. v. Morris, 72 S.W.2d 687, 691 (Tex. Civ. App.—Dallas 1934, no writ) (“A corporation stands in the relation of a trustee to its stockholders, so where it appears that a stockholder’s ownership is challenged by the company, he may maintain an action to establish his ownership.”); Green v. Galveston City Co., 191 S.W. 182, 185 (Tex. Civ. App.—Galveston 1916, writ ref’d) (“It is also true that a corporation stands in the relation of trustee to the owners of its stock.”).

 

Correlative Corporate Duties

The property rights of shareholders impose correlative duties on the corporation both to preserve and not to impair the rights and interests of its shareholders. Yeaman, 167 S.W. at 723. Absent some statutory or charter power, or the express consent of the shareholder, a corporation has no authority to forfeit a shareholder’s stock. See id. (“We are unwilling to affirm that, in the absence of some statutory or charter power, or express consent to that effect, a corporation has any authority to forfeit a stockholder’s shares upon such a ground.”). The corporation’s duty to its shareholders is to “to observe its trust for their benefit” and to preserve both the stock and its “fruits.” Id. With respect to a shareholder’s right to participate in a corporation’s profits through dividends, the Yeaman Court wrote: “There can be no substantial difference between the trusteeship of a corporation as it relates to the stock of a shareholder and its duty to him in respect to the profits or dividends upon his stock.” Id. at 724.

 

Duty to Acknowledge and Preserve Ownership Rights

As the Texas Supreme Court held in Yeaman, the corporation has a fiduciary duty to recognize, to respect, and not to attempt to interfere with a shareholder’s ownership: “The shareholder is entitled to rely upon [the corporation’s] not attempting to impair his interest. He . . . may confide in its protection for their security.” Yeaman v. Galveston City Co.,167 S.W. 710, 723 (Tex. 1914). The corporation “holds bare legal title,” Sharma v. Routh, 302 S.W.3d 355, 366 (Tex. App.—Houston [14th Dist.] 2009, no pet.); but it must recognize always that the shareholder is the “real owner.” Burns v. Miller, Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317, 322 (Tex. App.—Dallas 1997, writ denied). Absent some statutory or charter power, or the express consent of the shareholder, a corporation has no authority to forfeit a shareholder’s stock. See Yeaman, 167 S.W. at 723 (“We are unwilling to affirm that, in the absence of some statutory or charter power, or express consent to that effect, a corporation has any authority to forfeit a stockholder’s shares upon such a ground.”).

A trustee is also under a duty to the beneficiaries to administer the trust solely in the interest of the beneficiaries. RESTATEMENT (SECOND) OF TRUSTS §170(1) (2016); Ditta v. Conte, 298 S.W.3d 187, 191 (Tex. 2009) (“High fiduciary standards are imposed upon trustees, who must handle trust property solely for the beneficiaries’ benefit.”). A shareholder’s stock ownership includes a number of rights and interests, and the corporation has a duty not to “impair his interest.” Yeaman, 167 S.W. at 723. Trust law recognizes that the profits belong to the beneficiaries, not to the trustee. Steves v. United Servs. Auto. Ass’n, 459 S.W.2d 930, 936 (Tex. Civ. App.—Beaumont 1970, writ ref’d n.r.e.) (“profit from dealing with the property of the Trust is the property of the beneficiaries, not the trustee”); Hamman v. Ritchie, 547 S.W.2d 698, 710 (Tex. Civ. App.—Fort Worth 1977, writ ref’d n.r.e.) (“profits are the entitlement of the trust benefactor”). Therefore, the corporation’s duty to its shareholders is to “to observe its trust for their benefit” and to preserve both the stock and its “fruits.” Yeaman, 167 S.W. at 723.

 

Duty of Impartiality

Shares of common stock are required by law to be identical in all respects. Sec. 21.152 (c) (shares within the same class and series “must be identical in all respects”). Shares are fungible; none (within the same class) have greater rights or dignity than any other, and all are entitled to equal and impartial treatment by the corporation.

Most significant of the trustee duties in the context of minority shareholders in a closely-held corporation is the corporate trustee’s duty of impartiality towards multiple beneficiaries. When there are two or more beneficiaries of a trust, the trustee is under a strict duty to deal impartially with them. Brown v. Scherck, 393 S.W.2d 172, 181 (Tex. Civ. App.—Corpus Christi 1965, no writ) (“Where there are several beneficiaries, the trustee owes the same fiduciary duty to all of them to protect their respective interests, without partiality or favor to some beneficiaries at the expense of the others.”); DuPont v. S. Nat. Bank of Houston, Tex., 771 F.2d 874, 887 n.12 (5th Cir. 1985) (“has a duty to deal impartially with the beneficiaries of the trust”); RESTATEMENT (SECOND) OF TRUSTS § 183 (1959) (“When there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them.”); Restatement (Third) of Trusts § 79(1)(a)(2007) (a “trustee has a duty to administer the trust in a manner that is impartial with respect to the various beneficiaries of the trust[;] ... the trustee must act impartially and with due regard for the diverse beneficial interests created by the terms of the trust.”) This common-law principal is codified at Tex. Prop. Code Ann. § 117.008 (“If a trust has two or more beneficiaries, the trustee shall act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries.”). See also Varity Corp. v. Howe, 516 U.S. 489, 514 (1996) (“The common law of trusts recognizes the need to preserve assets to satisfy future, as well as present, claims and requires a trustee to take impartial account of the interests of all beneficiaries.”); Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 586 (1990) (“Trust law, in a similar manner, long has required trustees to serve the interests of all beneficiaries with impartiality.”); Palmer v. Chamberlin, 191 F.2d 532, 545 (5th Cir. 1951) (“[T]he trustees’ duty was to act impartially between all beneficiaries . . . .”); Pierre v. Connecticut Gen. Life Ins. Co./Life Ins. Co. of N. Am., 932 F.2d 1552, 1562 (5th Cir. 1991) (“duty to deal impartially with the beneficiaries of the trust”); Miss. Valley Trust Co. v. Buder, 47 F.2d 507, 509 (8th Cir. 1931) (“The duty of a trustee to act with impartiality toward the several cestuis que trustent must be conceded, but the law permits a reasonable and practical course of conduct and does not set an impossible or extreme standard.”); In re Estate of Stuchlik, 289 Neb. 673, 689, 857 N.W.2d 57, 70 (2014) (“If a trust has two or more beneficiaries, a trustee has a duty of impartiality among beneficiaries. This includes a duty to ‘act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests.”); Harrison v. Marcus, 486 N.E.2d 710, 714 n.11 (Mass. 1985) (“Where there are successive beneficiaries, the trustees ‘owe[ ] a duty to them to administer the trust with impartial consideration for the interests of all the beneficiaries’”); Estate of Sewell, 487 Pa. 379, 383, 409 A.2d 401, 402 (1979 (“It is axiomatic that ‘(w)hen there are two or more beneficiaries of a trust, the trustee is under a duty to deal impartially with them.’”); Johnson v. Johnson, 45 N.W.2d 573, 574 (Iowa 1951) (“A trustee must act at all times in good faith in administering the trust and impartially between the several beneficiaries thereof.”); In re Koretzky’s Estate v. Kislak, 86 A.2d 238, 250 (N.J. 1951) (“It is the duty of trustees to deal impartially with beneficiaries.”); Patterson v. Old Dominion Trust Co., 140 S.E. 810, 813 (Va. 1927) (“In the management of trust property, a trustee should always conduct himself with strict neutrality, favoring none of the parties to the suit, and endeavor to obtain an impartial direction in all cases of doubt or difficulty, and should also preserve and protect the trust fund for the benefit of all interested in the distribution thereof.”). Shares are fungible. Every share of the same class gets the same vote, the same dividend, and is entitled to the same treatment. In a dispute among shareholders over who will control the corporation, the corporation must remain strictly neutral. See Alexander v. Sturkie, 909 S.W.2d 166, 170 (Tex. App.—Houston [14th Dist.] 1995, writ denied).

Nothing can be more unjustifiable and dishonorable than an attempt on the part of those holding a majority of the shares in a corporation to place their nominees in control of the company, and then to use their control for the purpose of obtaining advantage to themselves at the expense of the minority. It would be a conspiracy to commit a breach of trust. The directors of a corporation are bound to administer its affairs with strict impartiality, in the interest of all the shareholders alike; and the inability of the minority to protect themselves against unauthorized acts, performed with the connivance of the majority, renders their right to the protection of the courts the clearer. Memphis & C. R. Co. v. Wood, 88 Ala. 630, 641-42, 7 So. 108, 112 (1889). The most common conduct challenged in oppression cases is manipulation of the control over the corporation to make the majority’s investment proportionally more valuable than the minority’s or otherwise to use the minority shareholder’s own corporation against him to disadvantage the minority relative to the majority. See Boehringer v. Konkel, 404 S.W.3d 18, 28 (Tex. App.—Houston [1st Dist.] 2013, no pet.) (oppression by majority’s $20,000 per month salary increase, which resulted in a “de facto dividend to the exclusion of . . . the minority shareholder”); Davis v. Sheerin, 754 S.W.2d 375, 382 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (oppression by payment of “informal dividends” only to the majority and use of corporate funds to pay the majority shareholder’s legal fees). Actions taken by the corporation that result in the impairment of minority rights and interest to the benefit of the majority shareholder or result in the majority shareholder enjoying a disproportionate share of the profits or capital value to the detriment of the minority violate the duty of impartiality. Thus, a refusal to issue dividends in an effort to harm the minority shareholders is a “wrong akin to breach of trust.” Patton v. Nicholas, 279 S.W.2d 848, 854 (Tex. 1955). This concept was accepted and reinforced in the Ritchie opinion by the majority’s argument that the corporation’s interests are not identical to the individual interests of its majority shareholders, and that officers and directors controlling a corporation have a duty “to the corporation and its shareholders collectively, not any individual shareholder or subgroup of shareholders, even if that subgroup represents a majority of the ownership.” Ritchie v. Rupe, 443 S.W.3d 856, 885 n.5 (Tex. 2014). To support this argument, the Ritchie opinon cites Redmon v. Griffith, 202 S.W.3d 225, 233 (Tex. App.—Tyler 2006, pet. denied); Somers ex rel. EGL, Inc. v. Crane, 295 S.W.3d 5, 11 (Tex. App.—Houston [1st Dist.] 2009, no pet.); Lindley v. McKnight, 349 S.W.3d 113, 124 (Tex. App.—Fort Worth 2011, no pet.); Hoggett v. Brown , 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Dist.] 1997, pet. denied). “We do not determine the best interest of the corporation by examining only the interest of its majority shareholder(s).” Ritchie, 443 S.W.3d at 885 n.53 (citing Holloway v. Skinner, 898 S.W.2d 793, 797 (Tex. 1995), as “holding that corporate officer and majority shareholder could be held liable for acting ‘in a manner that served his interests at the expense of the other shareholders’ because his interests and the corporation’s were not necessarily aligned.”).

 

a. Duty to Disclose and Account

The shareholders own the corporation and are the equitable or beneficial owners of all property possessed by the corporation, including all the information and all the records. See Cotten v. Weatherford Bancshares, Inc., 187 S.W.3d 687, 697 (Tex. App.—Fort Worth 2006, pet. denied). Those in charge of the corporation are merely the agents ultimately of the stockholders who are the real owners, and the owners are entitled to information as to the manner in which the corporate business is conducted. Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. Civ. App.—Amarillo 1930, writ ref’d). “While the corporation holds the legal title to its property, the stockholders are deemed the real and beneficial owners thereof and, as such, are entitled to information concerning the management of the property and business they have confided to the officers and directors of the corporation as their agents. A stockholder’s assertion of right to inspect the corporation’s books and records is sometimes said to be one merely for the inspection of what is his own.” State ex rel. G.M. Gustafson Co. v. Crookston Trust Co., 22 N.W.2d 911, 915–16 (Minn. 1946); accord Guthrie v. Harkness, 199 U.S. 148, 155 (1905).

A shareholder’s right to information about the corporation reflects the fundamental duties of disclosure owed by trustees. See RESTATEMENT (SECOND) OF TRUSTS § 172 (2016) (duty to the beneficiary to keep and render clear and accurate accounts with respect to the administration of the trust); id. § 173 (duty to the beneficiary to give him upon his request at reasonable times complete and accurate information as to the nature and amount of the trust property, and to permit him or a person duly authorized by him to inspect the subject matter of the trust and the accounts and vouchers and other documents relating to the trust). “In general, the common-law trustee of an irrevocable trust must produce trust-related information to the beneficiary on a reasonable basis, though this duty is sometimes limited and may be modified by the settlor.” United States v. Jicarilla Apache Nation, 564 U.S. 162, 183 (2011). Corporations are required by statute to keep records and accounts and to permit shareholders to inspect the records. See TEX. BUS. ORGS. CODE §§ 3.151–3.153, 21.173, 218–222. However, the shareholder’s right to access corporate records is meaningless if those records are not kept, or are not accurate. The corporation as a trustee, has a broader duty to keep complete and accurate records to be able to meet its duty to account to its beneficiaries for the management of their property. See Huie v. DeShazo, 922 S.W.2d 920, 923 (Tex. 1996) (trustees and executors owe beneficiaries “a fiduciary duty of full disclosure of all material facts known to them that might affect [the beneficiaries’] rights.”); Faulkner v. Bost, 137 S.W.3d 254, 259 (Tex. App.—Tyler 2004, no pet.) (“A trustee shall maintain a complete and accurate accounting of the administration of the trust.”); Shannon v. Frost Nat’l Bank, 533 S.W.2d 389, 393 (Tex. Civ. App.—San Antonio 1975, writ ref’d n.r.e.) (“[I]t is well settled that a trustee owes a duty to give to the beneficiary upon request complete and accurate information as to the administration of the trust” and “to make a frank and dull disclosure of all the information which it had.”) “The trustee should have at least given an accurate and complete statement of the trust estate, free from any suggestion of fraud.” Roberts, 587 S.W.2d at 181–82. See Conrad v. Judson, 465 S.W.2d 819, 828 (Tex. Civ. App.—Dallas 1971, writ ref’d n.r.e.) cert. denied 405 U.S. 1041 (1972); Cook v. Peacock, 154 S.W.2d 688, 691 (Tex. Civ. App.—Eastland 1941, writ ref’d w.o.m.).

 

Relationship of directors and officers to the corporation

Corporate officers and directors are fiduciaries of the corporation. See Int'l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 576 (Tex. 1963) (“Corporation officers and directors are fiduciaries”). “As such, officers and directors owe a duty to act only in the best interest of the corporation and its shareholders.” AmeriPath, Inc. v. Hebert, 447 S.W.3d 319, 340 (Tex. App.—Dallas 2014, pet. denied).

 

Relationship of directors and officers to the shareholders

As a general rule directors and officer owe their duties only to the corporation and owe no duties directly to the individual shareholders. Myer v. Cuevas, 119 S.W.3d 830, 836 (Tex. App.—San Antonio 2003, no pet.) (“corporate officers do not owe fiduciary duties to individual shareholders unless a contract or special relationship exists between them in addition to the corporate relationship.”). “A director's fiduciary duty runs only to the corporation, not to individual shareholders or even to a majority of the shareholders.” Richardson v. Newman, 439 S.W.3d 538, 542 (Tex. App.—Houston [1st Dist.] 2014, no pet.).

 

Relationship of shareholders to each other and to the corporation

Shareholders, as such, owe no duties to the corporation or to each other. See Kaspar v. Thorne, 755 S.W.2d 151, 155 (Tex.App.—Dallas 1988, no writ); Schoellkopf v. Pledger, 739 S.W.2d 914, 920 (Tex.App.—Dallas 1987), rev'd on other grounds, 762 S.W.2d 145 (Tex.1988); Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Dist.] 1997, pet. denied).