Property Rights and Privileges of Share Ownership

Property Rights and Privileges

 

Texas law recognizes “the property right which a share in such a company creates.” Yeaman v. Galveston City Co., 167 S.W. 710, 719 (Tex. 1914). In Texas, property rights are “sacred and fundamental,” State v. Texas City, 295 S.W.2d 697, 704 (Tex. Civ. App.—Galveston 1956), aff’d, 303 S.W.2d 780 (Tex. 1957); Ford v. Grand United Order of Odd Fellows, 50 S.W.2d 856, 859 (Tex. Civ. App.—Beaumont 1932, writ dism’d w.o.j.) (“right to own and have exclusive dominion over private property is a sacred one”); “a foundational liberty, not a contingent privilege,” Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, L.L.C., 363 S.W.3d 192, 204 n.34 (Tex. 2012); “natural, inherent, inalienable, not derived from the legislature and as preexisting even constitutions.” Eggemeyer v. Eggemeyer, 554 S.W.2d 137, 140 (Tex. 1977).

The right to acquire and own property, and to deal with it and use it as the owner chooses, so long as the use harms nobody, is a natural right. It does not owe its origin to constitutions. It existed before them. It is a part of the citizen’s natural liberty—an expression of his freedom, guaranteed as inviolate by every American Bill of Rights.

The ancient and established maxims of Anglo-Saxon law which protect these fundamental rights in the use, enjoyment and disposal of private property, are but the outgrowth of the long and arduous experience of mankind. They embody a painful, tragic history—the record of the struggle against tyranny, the overseership of prefects and the overlordship of kings and nobles, when nothing so well bespoke the serfdom of the subject as his incapability to own property. They proclaim the freedom of men from those odious despotisms, their liberty to earn and possess their own, to deal with it, to use it and dispose of it, not at the behest of a master, but in the manner that befits free men. Spann v. City of Dallas, 235 S.W. 513, 515 (Tex. 1921).

The Texas Supreme Court has stated that “freedom itself [] demand[s] strong protections for individual property rights.” Tex. Rice Land Partners, Ltd., 363 S.W.3d at 204. Protection of those rights is “one of the most important purposes of government.” Eggemeyer, 554 S.W.2d at 140.

In Moroney v. Moroney, 286 S.W. 167 (Tex. Comm’n App. 1926), the court wrote:

The corporation is a legal entity, and the title to its assets is vested in the corporation. The stockholder does own, however, his shares, stock, or interest whatsoever in the corporation, and this carries with it certain legal rights, but they are not the rights of a legal owner of the corporation assets in whole or in part. This distinction holds good even though all the stock may be held by a single individual. It does not follow from this, however, that the rights of a stockholder in a corporation are not of judicial cognizance. Id. at 169.

So what does the shareholder actually own? The stock that a shareholder owns is a set of intangible rights and interests with respect to the corporate enterprise. Turner v. Cattleman’s Trust Co. of Ft. Worth, 215 S.W. 831, 832 (Tex. Comm’n App. 1919) (““The tangible property belongs to the corporation. The shares of stock are the intangible interests in the corporate business owned by the individual shareholders.”); Presnall v. Stockyards Nat’l Bank, 151 S.W. 873, 876 (Tex. Civ. App.—Texarkana 1912), aff'd, 194 S.W. 384 (Tex. 1917) (“by a ‘share of stock’ and ‘share’ in a corporation, as used in the statute, is meant an intangible interest or right, in legal contemplation, of the owner in the corporation property or fund”). However, all property ownership ultimately constitutes an intangible “bundle of rights.” E.g., Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 382 (Tex. 2012) (“We have referred to property as a ‘bundle of rights.’”); Canyon Reg’l Water Auth. v. Guadalupe-Blanco River Auth., 258 S.W.3d 613, 618 (Tex. 2008) (“Where an owner possesses a full ‘bundle’ of property rights, the destruction of a ‘strand’ of the bundle is not a taking.”). The concept of property does not refer to a thing but rather to the rights and legal relationship between a person and a thing. Evanston Ins. Co., 370 S.W.3d at 382–83. The common law and statutes define these rights. Id. at 383. The Texas Supreme Court has listed among the “core rights in the bundle of property rights”:

(1) the right to exclusive possession; (2) the right to personal use and enjoyment; (3) the right to manage use by others; (4) the right to the income from use by others; (5) the right to the capital value, including alienation, consumption, waste, or destruction; (6) the right to security (that is, immunity from expropriation); (7) the power of transmissibility by gift, devise, or descent. Id.

In the context of stock ownership, Texas courts recognize that “[t]here are certain rights, powers, and privileges that accrue to a stockholder in a corporation.” Turner, 215 S.W. at 833. Texas courts have held that, in every profitable corporate venture, the rights of the stockholder are of great importance, and at all times will be properly protected, whether in a court of law or equity, according to the exigencies of the situation. Moroney, 286 S.W. at 169. The shareholder’s bundle of rights and interests that have been developed in the common law derive “from the nature of the organization, and the relation of the stockholders to the corporation and its property.” Moroney v. Moroney, 286 S.W. 167, 169 (Tex. Comm’n App. 1926). However, it should be noted that because corporations are set up differently, these rights and interests “may well vary from one corporation to the next.” Schautteet, 707 F. Supp. at 888. One court has listed shareholders’ rights as follows:

  • The right to vote.
  • That right to participate in dividends.
  • The right to participate in any distribution of net assets upon a reduction of capital or upon dissolution or liquidation.
  • The right to inspect the corporate books.
  • The right to subscribe for any additional shares offered by the corporation.
  • The right to bring a shareholder's derivative suit.
  • The duty to pay the corporation the amount of consideration for which the shares were authorized to be issued. Millar v. Mountcastle, 161 Ohio St. 409, 418–19, 119 N.E.2d 626, 632 (1954).

 

Recognition of Ownership

Perhaps the most obvious and central right of ownership is the assurance that the law will protect the existence and continuation of that ownership—that the owner has “the right to exclusive possession” and “the right to security.” Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 383 (Tex. 2012). See also Dos Republicas Coal P’ship v. Saucedo, 477 S.W.3d 828, 836 (Tex. App.—Corpus Christi-Edinburg 2015, no pet.) (“Under Texas common law, property ownership comes with a “bundle of rights” which includes, among other things, the rights of possession and use.”); Apr. Sound Mgmt. Corp. v. Concerned Prop. Owners for Apr. Sound, Inc., 153 S.W.3d 519, 525 (Tex. App.—Amarillo 2004, no pet.) (“The right to own and have exclusive dominion over private property is a sacred one, and it is a universal principle of law that the right to own property carries with it the right to control and dispose of it in such manner as not to contravene law or public policy.”). The stockholder is an owner. The stock is his property. It cannot be taken away without his consent. Yeaman v. Galveston City Co., 167 S.W. 710, 723 (Tex. 1914) (“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.”).

In the context of a shareholder’s ownership, this right means at a minimum that the corporation may not act to impair the shareholder’s ownership interest. Id. The stockholder has the right to have his ownership recorded on the books of the corporation, TEX. BUS. ORGS. CODE ANN. § 3.151(a)(3), and to have issued and delivered a stock certificate as written evidence of that ownership. Id. § 3.204.

 

Voice in the corporation.

Shareholders have the right to meet and vote. A fundamental right of property ownership is the right to manage the use of that property by others. Evanston Ins. Co., 370 S.W.3d at 383. The nature of the corporate organization involves control by the corporate entity over what the stock represents. Shareholders elect directors who “direct the management of the business and affairs of the corporation” without direct input by the shareholders. BUS. ORGS. at § 21.401. See, e.g., Solum Eng’g, Inc. v. Preis & Roy, P.L.C., No. 14-10-01054-CV, 2011 WL 4490049, at *3 (Tex. App.—Houston [14th Dist.] Sept. 29, 2011, pet. denied) (“[A] shareholder cannot terminate a corporation’s contractual obligations . . . .”). Yet the owner of the stock is entitled to a voice in owner-level decisions: who is to manage the property, what limitations or requirements are to be imposed on the managers, and whether to sell or make fundamental changes in the nature of the enterprise. Shareholders decide certain fundamental transactions. BUS. ORGS. at § 21.058 (amending bylaws); id. §§ 21.055(b), 21.364(b) (amending certificates); id. §§ 1.002(32) (mergers); id., 21.452(e) (sales of all or substantially all a corporation’s assets other than in the ordinary course of business); 21.457(a); id. §§ 1.002(32), 21.455(f), 21.457(a) (voluntary winding ups) id. §§ 21.364(b), 21.503(b). Shareholder also decided whether to remove directors. See id. §§ 21.405(a), 21.409(a). 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.”).

Some owner-level decisions require unanimity. BUS. ORGS. at § 21.502 (winding up or decision to revoke winding up); id. § 21.715 (shareholders’ agreement). Some require a majority. Id. § 21.409 (removal of director(s)); id. § 21.502(2) (winding up if business has not issued shares); see id. § 21.454 (approval of exchange of shares); id. § 21.455(a) (approval of sale of all or substantially all of assets). Some require a super-majority. Id. § 21.364 (amend certificate of formation, reinstatement, increase or decrease total number of authorized shares, change par value of shares, change rights of shares, create a new class of shares, change already declared dividend); § 21.457 (approval of fundamental business transaction). And the stockholder is entitled to his proportional share of the vote on each such decision. Among the “rights, powers, and privileges that accrue to a stockholder in a corporation,” are “the right to attend stockholders’ meetings and vote on matters under consideration by shareholders; the right to hold official position of trust in the corporation.” Turner v. Cattleman’s Trust Co. of Ft. Worth, 215 S.W. 831, 833 (Tex. Comm’n App. 1919). The right to vote, in particular, has long been recognized as one of the “incidents” of stock ownership. Farrington v. State of Tennessee, 95 U.S. 679, 687 (1877). (“The corporation, though holding and owning the capital stock, cannot vote upon it. It is the right and duty of the shareholders to vote. They in this way give continuity to the life of the corporation, and may thus control and direct its management and operations.”); Morrison v. St. Anthony Hotel, 274 S.W.2d 556, 567 (Tex. Civ. App.—Austin 1955, writ ref’d n.r.e.) (“incidents of stock ownership” include “the rights, pro tanto, to share in its management”). See also Baker v. Raymond Int’l, Inc., 656 F.2d 173, 180 (5th Cir. 1981) (“Ownership of a controlling interest in a corporation entitles the controlling stockholder to exercise the normal incidents of stock ownership, such as the right to choose directors and set general policies, without forfeiting the protection of limited liability.”). “It is well settled that courts have the power and authority to compel officers of a corporation to call meetings for election of directors. If no such powers were granted courts, a board of directors, by ignoring the demands of the by-laws for stated elections, could perpetuate themselves in office and rob stockholders of all voice in the affairs of the corporation.” Bard v. Kapp, 15 S.W.2d 719, 720 (Tex. Civ. App.—San Antonio 1929, writ ref'd)

But the broader principle, critical for the minority shareholder in a closely-held corporation who will likely always be out-voted, is that those in control of the corporation remain accountable to and ultimately subject to the will of the owners (collectively)—all the owners—and minority shareholders have a voice and a right to participate in that process. Therefore, each stockholder has a fundamental right to meet periodically with the other shareholders, to have the opportunity to confront management, and to vote on the directors and other matters in a proceeding where the vote of every share of the same class will be counted the same. See BUS. ORGS. at §§ 21.351–21.363.

 

Information.

A necessary corollary to the fundamental right to manage the use of one’s property by others is the right to information, so that the shareholder may “ascertain whether the affairs of the corporation are properly conducted and that he may vote intelligently on questions of corporate policy and management.” Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d). “A minority shareholder has very few rights. By definition, those shareholders who, along with their allies, are in the majority, have sufficient votes to nullify the minority’s right of franchise. In such instance, about the only thing left to a dissatisfied minority stockholder is his right to inspect, coupled with his right to denounce any matters disclosed by his inspection.” Perry v. Perry Bros., Inc., 753 S.W.2d 773, 777 (Tex. App.—Dallas 1988, no writ) (Howell, J., dissenting). The right to information has been held to be “a privilege . . . incident to [the] ownership of stock.” Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d at 153 (shareholder’s right to examine the books and records of the corporation “is a privilege . . . incident to his ownership of stock.”). It is a “valuable right.” Chavco Inv. Co., Inc. v. Pybus, 613 S.W.2d 806, 809 (Tex. Civ. App.—Houston [14th Dist.] 1981, writ ref’d n.r.e.) (“The right of a stockholder as conferred by statute to examine the corporate records, although not absolute, is a valuable right.”). The owner is entitled to know what is going on in his own company, how his investment is doing, what it is worth, how his money is being spent, how his property is being managed.

Corporations are required by statute to keep records and accounts and to permit shareholders to inspect the records. See BUS. ORGS. at §§ 3.151–3.153, 21.173, 21.218–21.222. The statutory right of inspection in Texas is limited to current shareholders who have held their shares for at least six months or who hold at least five percent of all the outstanding shares of the corporation. Id. § 21.218(b). However, all shareholders have a common law right of inspection if the inspection is made in good faith for a proper purpose. Williams v. Freeport Sulphur Co., 40 S.W.2d 817, 825 (Tex. Civ. App.—Galveston 1930, no writ) (holding that the right of inspection is provided “both by the common law and the statutes of this state”); see also Palacios v. Corbett, 172 S.W. 777, 782 (Tex. Civ. App.—San Antonio 1915, writ ref’d) (finding a common law right to inspect county records). “There can be no question that the decisive weight of American authority recognizes the common-law right of the shareholder, for proper purposes and under reasonable regulations as to place and time, to inspect the books of the corporation of which he is a member.” Guthrie v. Harkness, 199 U.S. 148, 153 (1905). Texas courts have held that the passage of a legislative right of inspection does not negate the preexisting common law right. Tex. Infra-Red Radiant Co. v. Erwin, 397 S.W.2d 491, 493 (Tex. Civ. App.—Eastland 1965, writ ref’d n.r.e.). Similarly, the inspection statute itself makes clear that it does not preempt common-law rights. BUS. ORGS. at § 21.218(c).

 

Proportional Share in the Profits.

Another fundamental property right is the “right to the income from use by others.” Evanston Ins. Co., 370 S.W.3d at 383. As the Texas Supreme Court has stated, “a right to [property] essentially implies a right to profits accruing from it, since, without the latter, the former can be of no value.” Sheffield v. Hogg, 77 S.W.2d 1021, 1028 (Tex. 1934); see also Exxon Corp. v. Breezevale Ltd., 82 S.W.3d 429, 436–37 (Tex. App.—Dallas 2002, pet. denied) (“[T]hus a devise of the profits of land, or even a grant of them, will pass a right to the land itself. Thus a conveyance of an interest in the minerals that are produced from land, such as a working interest or a royalty interest, passes a right to the land itself.”); U.S. Pipeline Corp. v. Kinder, 609 S.W.2d 837, 839 (Tex. Civ. App.—Fort Worth 1980, writ ref’d n.r.e.). The principal reason for stock ownership is the expectation of economic return, if the venture is successful. Texas cases have held that the right to share “protanto” in the corporation’s “profits and, upon dissolution, its assets” are among the “incidents of stock ownership.” Morrison v. St. Anthony Hotel, 274 S.W.2d 556, 567 (Tex. Civ. App.—Austin 1955, writ ref’d n.r.e.). Among the “rights, powers, and privileges that accrue to a stockholder in a corporation” is “the right to receive dividends from the profits and gains made by the common fund.” Turner v. Cattleman’s Trust Co. of Ft. Worth, 215 S.W. 831, 833 (Tex. Comm’n App. 1919). So important is the right of shareholders to participate in corporate profits, “that courts of equity will, in a proper case, compel a payment of dividends.” Moroney v. Moroney, 286 S.W. 167, 169 (Tex. Comm’n App. 1926); see also Farrington v. State of Tennessee, 95 U.S. 679, 687 (1877) (listing among the fundamental aspects of share ownership the entitlement “to share in the dividends and profits.”).

Because the shareholder beneficially owns a definite portion of the corporate enterprise, his property right is not only to receive a share in any economic return but to receive the full proportional share of what is his own. See Auto. Mortgage Co. v. Ayub, 266 S.W. 134, 135 (Tex. Comm’n App. 1924) (“It is generally agreed that shares in an incorporated company are the aliquot parts of the capital stock, and merely give to the owner a right to his share of the profits of the corporation, while it is a going concern, and to a share of the proceeds of its assets, when sold for distribution in case of its dissolution and winding up.”) (quoting Presnall v. Stockyards Nat. Bank, 151 S. W. 873 (Tex. Civ. App.—Texarkana 1912); Olsen v. Homestead Land & Imp. Co., 28 S.W. 944 (Tex. 1894) (“The right which a shareholder in a corporation has by reason of his ownership of shares is a right to participate, according to the amount of his stock, in the surplus profits of the corporation on a division, and ultimately on its dissolution in the assets remaining after the payment of its debts.”); Byerly v. Camey, 161 S.W.2d 1105, 1110 (Tex. Civ. App.—Fort Worth 1942, writ ref’d w.o.m.) (“The stockholder has a right to his share of the profits while the corporation is a going concern, and to a share of the proceeds of its assets, when sold for distribution in case of its dissolution and winding up.”). See I-10 Colony, Inc. v. Chao Kuan Lee, 393 S.W.3d 467, 478 (Tex. App.—Houston [14th Dist.] 2012) (“The general rule for cotenants in Texas is that they are required to share any income or rents generated from the jointly-owned property according to their respective interests . . . .”). The analogy breaks down to some extent because shareholders do not hold direct title to the corporate assets and thus are not really tenants in common of those assets, at least not until dissolution. Eddings v. Black, 602 S.W.2d 353, 358 (Tex. Civ. App.—El Paso 1980, writ ref’d n.r.e.) (“[W]here the tenant in possession rents the property to a third person, he must account to his cotenant. Rents and profits received by one cotenant are held by him in trust for his cotenants.”); Auto. Mortgage Co., 266 S.W. at 135 (Tex. Comm’n App. 1924) (“The whole title to it is in the corporation, and the shareholders are neither tenants in common nor in any legal sense the owners of it.”) (quoting United States Radiator Corp. v. State, 101 N. E. 783, 786 (N.Y. 1913)); Montgomery v. Heath, 283 S.W. 324, 327 (Tex. Civ. App.—Amarillo 1926), aff‘d in part, rev‘d in part on other grounds, 291 S.W. 855 (Tex. Comm’n App. 1927) (the shareholders of the defunct corporation become “owners as tenants in common of its property”). Shareholders do not have a right to an accounting from each other for disproportionate benefits; however, they do have the right to their proportional share of the earnings from the corporation. See also Burton v. Exxon Corp., 583 F.Supp. 405, 418 (S.D.N.Y. 1984) (“[S]tockholders are owners of the corporation and expect to share in its profits.”); Michaud v. Morris, 603 So. 2d 886, 888 (Ala. 1992) (“Certain basic expectations of investors are enforceable in the courts, and among those is a right to share proportionally in corporate gains.”); Burt v. Burt Boiler Works, Inc., 360 So. 2d 327, 332 (Ala. 1978) (“Should they, acting through the board and corporate officers, which they control, deprive the minority stockholders of their just share of the corporate gains, such would, of course, be actionable.”); Baur v. Baur Farms, Inc., 832 N.W.2d 663, 673 (Iowa 2013) (citing “the principle that every shareholder may reasonably expect to share proportionally in a corporation’s gains.”); Baker v. Comm’l Body Builders, Inc., 507 P.2d 387, 397 (Or. 1973) (explaining shareholders have “a legitimate interest in the participation in profits earned by the corporation”). Because share ownership involves multiple undivided interests, an analogy might be drawn to other situations involving multiple owners of a single property—or tenants in common—who have a duty to share profits proportionally and are accountable to the other co-owners.

 

Right of Alienation

The rights of property ownership include “the right to the capital value, including alienation… [and] the power of transmissibility by gift, devise, or descent.” Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 383 (Tex. 2012). “Transferability is the primary value-imparting characteristic of most property interests,” Cooper v. United States, 322 F. Supp. 2d 733, 737 (E.D. Tex. 2004), including stock ownership. See Tenneco, Inc. v. Enter. Prod. Co., 925 S.W.2d 640, 646 (Tex. 1996) (“Sound corporate jurisprudence requires that courts narrowly construe rights of first refusal and other provisions that effectively restrict the free transfer of stock.”); Sandor Petroleum Corp. v. Williams, 321 S.W.2d 614, 617 (Tex. Civ. App.—Eastland 1959, writ ref’d n.r.e.) (“Generally speaking, corporate shares of stock are property which may be freely sold and delivered.”). “Alienability is a legal incident of property, and restraints against it are generally contrary to public policy.” Hicks v. Castille, 313 S.W.3d 874, 881 (Tex. App.—Amarillo 2010, pet. denied); See TEX. CONST. art. I, § 26 interp. commentary (West 2007) (“The framers of the Texas Constitutions, beginning with that of the Republic, have believed in an unrestrained power to convey or transfer property, and thus have written into the Bill of Rights this provision against perpetuities, primogeniture and the entailment of estates.”). While restrictions on the transferability of stock are permitted, they must be reasonable, consented to by the stockholder, clearly disclosed, and not violative of public policy. Dixie Pipe Sales, Inc. v. Perry, 834 S.W.2d 491, 493 (Tex. App.—Houston [14th Dist.] 1992, writ denied); see also BUS. ORGS. at § 21.209 (“Except as otherwise provided by this code, the shares and other securities of a corporation are transferable in accordance with Chapter 8, Business & Commerce Code.”); id. §§ 21.210–21.213 (stating manner of creating restrictions and listing examples of valid restrictions on transfer of shares); TEX. BUS. & COM. CODE § 8.204 & cmt. 1 (West 1995) (validity of restriction determined by other law, but any restriction on transfer must be noted conspicuously on certificate if certificated security to be enforceable).

 

Other Rights

The fundamental property rights of shareholders that arise from the nature of share ownership are not the only rights and privileges. Individual corporation may create further rights in their governing document or by agreement among the shareholders. Texas courts have acknowledged that an “array of rights” possessed the individual shareholders “spring from many sources: (1) the corporation’s organic documents, (2) agreements between shareholders or between the corporation and shareholders, (3) statutory corporation law, and (4) decisional law governing the operation of corporations.” Schautteet v. Chester State Bank, 707 F. Supp. 885, 888 (E.D. Tex. 1988). Therefore, these rights “may well vary from one corporation to the next.” Id.