Retrospective on Texas Corporate Law
Corporations are so ubiquitous that it is surprising that they are a relatively recent legal development. Here is a history of the development of the Texas corporation.
“Domestic corporations are the creatures of the state, under its dominion and control.” Zerr v. Lawlor, 300 S.W. 112, 113 (Tex. Civ. App.—San Antonio 1927, no writ). “A corporation—whether for-profit or not-for-profit—is a distinct legal entity which comes into existence by charter from the state.” Waddill v. Phi Gamma Delta Fraternity Lambda Tau Chapter Texas Tech Univ., 114 S.W.3d 136, 141 (Tex. App.—Austin 2003, no pet.).
The concept of a corporation—a private business organization composed of a group of individual participants but having its own separate legal identity—traces its roots back to Roman law. See 1 Fletcher Cyc. Of the Law of Corp. § 1 (September 2016 Update) (“According to 1 W. Blackstone, Commentaries on the Laws of England 468, “The honor of originally inventing” the corporate concept falls to the Romans. The first corporations (corpora, corporata) were bodies politic consisting of ‘separate societies of every manual trade and profession. They were afterwards much considered by the civil law.’”); see also Leach v. F.D.I.C., 860 F.2d 1266, 1270 & n.7 (5th Cir. 1988) (noting “the antecedents of the modern corporation reach back to Ancient Rome,” citing 1 W. Blackstone, Commentaries 468, 469). The English Crown granted corporate charters to many public, municipal, and charitable corporations, which seem to have “been the models upon which the organization of a business corporation was devised, furnishing the concept of a separate collective business or private entity operating through representative personal agents or officers.” 1 Fletcher Cyc. Corp. § 1. With the growth of the English Empire, corporate charters were granted to many colonial institutions, which served public, but also distinctly for-profit purposes—familiar examples include the East India Company, chartered by Elizabeth I, and the Hudson Bay Company. Id. See also Leach v. F.D.I.C., 860 F.2d at 1270 & n.8 (“the large commercial corporations of the modern era began to make their appearance in the form of the great trading houses of England during the middle of the Seventeenth Century” with some of the “more familiar trading corporations were the East India Company and Hudson Bay Company.”). Many of the American colonies, including Virginia, chartered in 1606, and Massachusetts, chartered in 1629, were essentially for-profit corporations serving public purposes. 1 Fletcher Cyc. Corp. § 2.
The legal development of the modern corporation in the United States was led by important decisions of the United States Supreme Court, including most significantly Chief Justice Marshall’s opinion in McCulloch v. Maryland holding that the United States had the constitutional power to charter the controversial Bank of the United States. M'Culloch v. Maryland, 17 U.S. 316, 424, 4 L. Ed. 579 (1819) (“After the most deliberate consideration, it is the unanimous and decided opinion of this court, that the act to incorporate the Bank of the United States is a law made in pursuance of the constitution, and is a part of the supreme law of the land.”). Nevertheless, in the early years of this nation, the corporate business form “labored” under a “cloud of disfavor.” Citizens United v. Fed. Election Com'n, 558 U.S. 310, 427 (2010) (Stevens, J., dissenting); see also L. Friedman, A History of American Law 194 (2d ed.1985) (“The word ‘soulless' constantly recurs in debates over corporations.... Corporations, it was feared, could concentrate the worst urges of whole groups of men”). In 1804, the Supreme Court held that a corporation’s power to act is strictly limited to the terms of its charter and “all the qualities and disabilities annexed by the common law to ancient institutions of this sort,” Head & Amory v. Providence Ins. Co., 6 U.S. 127, 167 (1804), and that the corporation does not have the power to act as a natural person and to do things not provided by the charter. See id. at 168-69. See also Beaty v. Knowler's Lessee, 29 U.S. 152, 168 (1830) (“That a corporation is strictly limited to the exercise of those powers, which are specifically conferred on it, will not be denied. The exercise of the corporate franchise, being restrictive of individual rights, cannot be extended beyond the letter and spirit of the act of incorporation.”). This recognition of strict limits on corporate power enabled the idea of the corporate entity to become more “well established,” “and with a vast territory open for commercial development, business corporations multiplied rapidly in number and importance.” 1 Fletcher Cyc. Corp. § 2. From the beginning, American law has been clear that the corporation is a separate entity, a legal “person” distinguishable from its owners: “As our ideas of a corporation, its privileges and its disabilities, are derived entirely from the English books, we resort to them for aid, in ascertaining its character. It is defined as a mere creature of the law, invisible, intangible, and incorporeal. Yet, when we examine the subject further, we find that corporations have been included within terms of description appropriated to real persons.” Bank of U.S. v. Deveaux, 9 U.S. 61, 88 (1809). See also United States v. Amedy, 24 U.S. 392, 412 (1826) (holding that a statute restricting certain acts by “persons” applied both to “private or corporate persons”). “The great object of an incorporation is to bestow the character and properties of individuality on a collective and changing body of men. This capacity is always given to such a body.” Providence Bank v. Billings, 29 U.S. 514, 562 (1830).
In Trustees of Dartmouth Coll. v. Woodward, 17 U.S. 518, 636 (1819), Chief Justice Marshall described the corporation as follows:
A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, individuality; properties by which a perpetual succession of many persons are considered as the same, and may act a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand. It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use. By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being.
Justice Story’s concurring opinion amplified this point:
An aggregate corporation, at common law, is a collection of individuals, united into one collective body, under a special name, and possessing certain immunities, privileges and capacities, in its collective character, which do not belong to the natural persons composing it. Among other things, it possesses the capacity of perpetual succession, and of acting by the collected vote or will of its component members, and of suing and being sued in all things touching its corporate rights and duties. It is, in short, an artificial person, existing in contemplation of law, and endowed with certain powers and franchises which, though they must be exercised through the medium of its natural members, are yet considered as subsisting in the corporation itself, as distinctly as if it were a real personage. Hence, such a corporation may sue and be sued by its own members, and may contract with them in the same manner, as with any strangers. Id. at 667–68 (Story, J., concurring).
The Supreme Court held that a private corporation, even if set up by the government to serve public purposes, remains a private entity, owned by private persons, and not an instrument of the government. Id. at 669 (“a bank, whose stock is owned by private persons, is a private corporation, although it is erected by the government, and its objects and operations partake of a public nature. The same doctrine may be affirmed of insurance, canal, bridge and turnpike companies. In all these cases, the uses may, in a certain sense, be called public, but the corporations are private; as much so, indeed, as if the franchises were vested in a single person.”). The members of a private corporation have vested rights, including particularly the right to vote, which the law will protect. Id. at 701 (“It is a right of voting and acting in the corporate concerns, which the law recognises and enforces, and for a violation of which it provides a remedy. It is founded on the same basis as the right of voting in public elections; it is as sacred a right; and whatever might have been the prevalence of former doubts, since the time of Lord HOLT, such a right has always been deemed a valuable franchise or privilege.”). Furthermore, the management of the corporation has vested rights in the control of its assets, the regulation of its affairs, and the selection of its officers. Id. at 703 (“But there are other rights and privileges, belonging to the trustees, collectively and severally, which are deserving of notice. They are intrusted with the exclusive power to manage the funds, to choose the officers, and to regulate the corporate concerns, according to their own discretion. The jus patronatús is vested in them.”). Any attempt by the state to take away these powers and privileges constitutes a violation of the charter. Id. at 712 (“In my judgment, it is perfectly clear, that any act of a legislature which takes away any powers or franchises vested by its charter in a private corporation, or its corporate officers, or which restrains or controls the legitimate exercise of them, or transfers them to other persons, without its assent, is a violation of the obligations of that charter. If the legislature mean to claim such an authority, it must be reserved in the grant. “). The Supreme Court also held that the majority of the shareholders of a corporation had the power to bind all of the individual shareholders by their vote. Korn v. Mut. Assur. Soc., 10 U.S. 192, 200–01 (1810). Nevertheless, the corporation remains subject to the general law of the land, and subject to the jurisdiction of the courts to address “abuse of trust” and to “suppress frauds.” 17 U.S. at 676 (Story, J., concurring) (“But an eleemosynary, like every other corporation, is subject to the general law of the land. … But they are not, therefore, placed beyond the reach of the law. As managers of the revenues of the corporation, they are subject to the general superintending power of the court of chancery, not as itself possessing a visitatorial power, or a right to control the charity, but as possessing a general jurisdiction, in all cases of an abuse of trust, to redress grievances and suppress frauds.”).
As the law governing corporations developed in the early Nineteenth Century, the corporation became more accepted and common. As the late Justice Scalia has written: “There were approximately 335 charters issued to business corporations in the United States by the end of the 18th century. This was a considerable extension of corporate enterprise in the field of business, and represented unprecedented growth. Moreover, what seems like a small number by today’s standards surely does not indicate the relative importance of corporations when the Nation was considerably smaller. As I have previously noted, ‘[b]y the end of the eighteenth century the corporation was a familiar figure in American economic life.” Citizens United v. Fed. Election Com'n, 558 U.S. 310, 386–87 (2010) (Scalia, J., concurring) (quoting McConnell v. Federal Election Comm'n, 540 U.S. 93, 256 (2003) (SCALIA, J., concurring in part, concurring in judgment in part, and dissenting in part) (quoting C. Cooke, Corporation Trust and Company 92 (1951))). Nevertheless, general acceptance of the institution of the private corporation grew slowly: “The distrust of corporations created under special act of incorporation, relaxed for a time, grew again with experience; and in many state constitutions, there are and have been for a long time limitations on legislative power to create corporations by special act.” 1 Fletcher Cyc. Corp. § 2
The troubled history of the corporation as a legal institution was summarized by Justice Brandeis in his famous dissent in Louis K. Liggett Co. v. Lee, 288 U.S. 517 (1933):
The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational, and charitable purposes by corporations. So at first the corporate of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So at first the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided. The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality of opportunity. Louis K. Liggett Co. v. Lee, 288 U.S. 517, 548–49 (1933) (Brandeis, J. dissenting).
Limitations generally imposed on corporations included:
Limitation upon the amount of the authorized capital of business corporations was long universal. The maximum limit frequently varied with the kinds of business to be carried on, being dependent apparently upon the supposed requirements of the efficient unit. Although the statutory limits were changed from time to time, this principle of limitation was long retained. Id. at 550.
Limitations upon the scope of a business corporation's powers and activity were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes—usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, and manufacturing enterprises. Permission to incorporate for ‘any lawful purpose' was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. All, or a majority, of the incorporators or directors, or both, were required to be residents of the incorporating state. The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Id. at 554–55.
General corporations statutes did not become common until well into the Nineteenth Century. See Citizens United v. Fed. Election Com'n, 558 U.S. at 427 (Stevens, J., dissenting). And these statutes were not so much the product of liberalized views of the corporate form as “the desire for equality and the dread of special privilege” that had been the product of individual charter grants by state legislature. Louis K. Liggett Co. v. Lee, 288 U.S. at 549 n.4 (Brandeis, J., dissenting). Similarly, the gradual lifting of statutory restrictions on corporations was due, “not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation.” Id. at 557.
Truly modern corporate statutes did not begin to be adopted until the 1950s with the creation of the Model Business Corporation Act, which was first developed in 1950 by the Committee on Corporate Laws of the Section of Corporation, Banking and Business Law (now known as the Section of Business Law) of the American Bar Association. 1 Fletcher Cyc. Corp. § 2.50.
Development in Texas
According to the late Professor Alan Bromberg, “Business and commercial law in Texas has been made primarily in two places: the Legislature and the law offices. The courts have had a lesser role in making it, though they have had some role in unmaking it.” Alan R. Bromberg, Texas Business Organization and Commercial Law-Two Centuries of Development, 55 SMU L. Rev. 83, 83 (2002). This is somewhat of an overstatement, but it is true most corporate legal relationships “are largely matters governed by statute and contract.” Ritchie v. Rupe, 443 S.W.3d 856, 879–80 (Tex. 2014), citing Empire Mills v. Alston Grocery Co., 15 S.W. 505 (Tex. App. 1891, no writ) (“A corporation is the creature of a statute immediately creating it, or authorizing proceedings for its organization.”); Calvert v. Capital Sw. Corp., 441 S.W.2d 247, 255 (Tex. Civ. App.-Austin 1969, writ ref'd n.r.e.) (“[T]he charter of a corporation creates contractual relations between the corporation and its shareholders”).
The legal concept, universally agreed in post-Revolutionary War America, that the power to form corporations, which in England belonged to both king and parliament, was lodged solely in the legislatures and that statutory authority was therefore requisite to the creation of any corporation, was carried into Texas by its Anglo-American settlers, and codified Art. 2, § 3 of the Constitution of the Republic of Texas gives the congress of the Republic the power “to grant charters of incorporation.” Tex. Const. art. XII, § 1 Interpretive Commentary (2007).
In its early days, Texas political institutions were hostile to corporations, particularly banks, Bromberg, supra, as is evidence by the provision in the Texas constitution of 1845, proclaiming: “No corporate body shall hereafter be created, renewed or extended, with banking or discounting privileges.” Tex. Const. art. VII, § 30 (1845). The same language is in Tex. Const. art. VII § 30 (1861) and Tex. Const. art. VII § 30 (1866). Nonbanking corporations were regarded with somewhat less hostility than banks, Bromberg, supra, but their creation require a special act of the Congress of the Republic of Texas, and later the state legislature. The 1836 Constitution merely gave the Congress the power “to grant charters of incorporation.” Tex. Const. art. II, § 3 (1836). “No private corporation shall be created unless the bill creating it shall be passed by two thirds of both Houses of the Legislature; and two thirds of the Legislature shall have power to revoke and repeal all private corporations by making compensation for their franchises.” Tex. Const. art. VII, § 31 (1845). The same language appears in Tex. Const. art. VII, § 31 (1861); Tex. Const. art. VII, § 31 (1866).
Few private corporations were created by the Legislature, and they were mostly limited in purpose, capitalization, duration, and sometimes in land ownership. Bromberg supra. One notable example was the Galveston City Company, which was organized in 1836 for the purpose of land speculation in the development of the City of Galveston and which was incorporated by an act of the Congress of the Republic on February 5, 1841. See generally Yeaman v. Galveston City Co., 106 Tex. 389, 417, 167 S.W. 710, 718 (1914). Many of the early Texas judicial opinions on a variety of matters in corporate law arose out of the sometimes stormy relations between the Galveston City Co. and its shareholders. See, e.g., Ware v. Galveston City Co., 146 U.S. 102, 13 S. Ct. 33, 36 L. Ed. 904 (1892); Galveston City Co. v. Scott, 42 Tex. 535 (1875); Galveston City Co. v. Sibley, 56 Tex. 269 (1882); Yeaman v. Galveston City Co., 106 Tex. 389, 167 S.W. 710 (1914); Converse v. Galveston City Co., 189 S.W. 539 (Tex. Civ. App.—Galveston 1916, writ ref'd); Condit v. Galveston City Co., 186 S.W. 395 (Tex. Civ. App.—Galveston 1916, writ ref'd); Green v. Galveston City Co., 191 S.W. 182 (Tex. Civ. App.—Galveston 1916, writ ref'd); League v. Galveston City Co., 192 S.W. 350 (Tex. Civ. App.—Galveston 1917, writ ref'd). Because each corporation was a special creation of the state legislature, the corporate structure, governance and operations for each individual corporation varied in considerable detail from corporation to corporation. Efforts to shift to incorporation by general laws began in 1871 with Democratic prodding of the Republican-controlled Legislature. The 1869 Reconstruction Constitution then in force said nothing about corporations and thus would have permitted general incorporation statutes. But the first two efforts failed because of ineptitude or, as the Democrats charged, from sabotage. The first bill lacked an enacting clause. The second purported to but did not reenact the first. Only the third, after Democrats gained control of the Legislature, was properly passed.
The 1874 corporations law joined the trend, which had begun in the United States almost a century earlier and had become widespread in the later 1800s, toward business incorporation by general law, i.e. by filing incorporation documents with a state official rather than by having the Legislature enact a special statute for each corporation. The factors contributing to the trend were, first, the recognition of the utility of the business corporation as a capital gathering device to finance large scale, capital intensive enterprise, and second, the recognition of the potential—all too often realized—for corruption and bribery in the legislative grant of special charters.
Under the terms of the 1874 legislation, corporations could be created only for a limited list of 27 designated purposes or groups of purposes. The distrust of corporations in 1874 was manifested in ways other than limitations on corporate purposes. Their life was limited to 20 years, and they were prohibited from employing their stock, means, assets, or other property, directly or indirectly, for any other purpose whatever, other than to accomplish the legitimate objects of the creation. Stock was personal property, transferable only on the corporate books in accordance with the bylaws. Limited liability was explicitly granted: a stockholder was not “liable to pay the debts of the corporation beyond the amount unpaid on his stock.”
The Reconstruction Constitution of 1869 had been subject to “a great deal of acrid criticism for its complete failure to mention corporations,” and the Democrats openly accused the reconstruction legislatures of being bribed by corporation lobbies to sabotage deliberately the enactment of general incorporation statutes. Tex. Const. art. XII, § 1 Interpretive Commentary (2007). When the Constitutional Convention of 1875 was called under Democratic auspices, it was not surprising to find strong sentiment in favor of henceforth prohibiting all special laws for the creation of private corporations. The 1876 Constitution expressly provided that “No private corporation shall be created except by general laws,” Tex. Const. art. XII, § 1, and that “General laws shall be enacted providing for the creation of private corporations, and shall therein provide fully for the adequate protection of the public and of the individual stockholders.” Tex. Const. art. XII, § 2. Both those provisions survive to this day. The object of these two provisions was chiefly to prevent the granting of special privileges to one body of men, without giving all others the right to obtain them on the same conditions; and partly to prevent bribery and corruption of legislators. Tex. Const. art. XII, § 2 Interpretive Commentary (2007).
The general corporation statute adopted in 1874 remained the only general corporation statute until 1955. E. Miller & R. Ragazzo, 19 Tex. Prac., Business Organizations § 1:2 (3d ed. October 2016 Update). In Justice Brandeis’ discussion of the history of corporate legislative restrictions, he noted that Texas still retained strict limits on certain corporations as late as 1933. Louis K. Liggett Co. v. Lee, 288 U.S. at 552–54 (Brandeis, J. dissenting).
Early Texas Judicial development of corporate law
Prior to the development of comprehensive modern corporate statutes in Texas, the Texas courts developed the common law governing corporations, particularly in the area of shareholder rights. Texas courts recognized that corporations were limited to the powers and purposes enumerated in their charters and would be restrained judicially from ultra vires acts. E.g., Rio Grande R. Co. v. City of Brownsville, 45 Tex. 88, 91 (1876) (“A corporation being a mere creature of law is endowed with and can lawfully exercise only such powers and functions as are conferred upon it by its charter or with which it has been otherwise empowered by law.”); Houston & T.C.R. Co. v. Shirley, 54 Tex. 125, 139 (1880) (“The powers of corporations are strictly limited to those granted in their charters or by law.”); Fort Worth St. Ry. Co. v. Rosedale St. Ry. Co., 68 Tex. 169, 176, 4 S.W. 534, 537 (1887) (“Through its act of incorporation the appellant acquired simply a corporate existence, through which it might conduct the business specified in its articles of incorporation; this being such as the general law, under which incorporation was effected, contemplates.”); N. Side Ry. Co. v. Worthington, 88 Tex. 562, 568, 30 S.W. 1055, 1056 (1895) (“Corporations are the creatures of the law, and they can only exercise such powers as are granted by the law of their creation.”). However, Texas common law introduced considerable flexibility into the ultra vires doctrine by recognizing implied and incidental powers. Miller v. Burch, 32 Tex. 208, 210 (1869) (“The question is well settled that a corporation can exercise no power not clearly delegated in the act of incorporation, or arising by necessary implication out of some delegated power.”); N. Side Ry. Co. v. Worthington, 88 Tex. 562, 568, 30 S.W. 1055, 1056 (1895) (“An express grant, however, is not necessary. In every express grant there is implied a power to do whatever is necessary or reasonably appropriate to the exercise of the authority expressly conferred.”); Staacke v. Routledge, 111 Tex. 489, 498, 241 S.W. 994, 997 (1922) (“A corporation may not only convey or transfer its property absolutely, but, since the power to lease is an incident to the ownership of the property, it may lease the same.”); W.C. Bowman Lumber Co. v. Pierson, 110 Tex. 543, 545, 221 S.W. 930, 931 (1920) (“Every corporation is created with certain express powers. Being endowed with these express powers, it has the implied power to do whatever is necessary or reasonably appropriate to their exercise. It has, in a word, the authority to do whatever will legitimately effect the express purposes of its creation. A corporation formed for the prosecution of a business may foster that business by necessary or appropriate means-those means which are direct, in their nature related to the objects of the corporation, and by whose employment those objects will be directly furthered.”); Stephens County v. J.N. McCammon, Inc., 122 Tex. 148, 156, 52 S.W.2d 53, 56 (1932) (“A corporation in the transaction of its business has the same latitude as the individual in the same character of business, in those things that are essential to the successful operation of that particular business.”); Helms v. Home Owners' Loan Corp., 129 Tex. 121, 131, 103 S.W.2d 128, 133 (1937) (“Every corporation is created with certain express powers. Being endowed with these express powers, it has the implied power to do whatever is necessary or reasonably appropriate to their exercise. It has, in a word, the authority to do whatever will legitimately effect the express purposes of its creation.”); L. G. Balfour Co. v. Gossett, 131 Tex. 348, 354, 115 S.W.2d 594, 598 (1938) (“Of course, in all grants of corporate power, there exist not only the powers expressly granted, but such implied powers as are necessary, or reasonably appropriate, to the exercise of the powers expressly granted.”). Texas case law followed the “trend of recent laws and decisions” liberalizing the delegation of board powers, San Antonio, Joint Stock Land Bank v. Taylor, 129 Tex. 335, 341, 105 S.W.2d 650, 654 (1937), to permit broad delegation to professional management. Tempel v. Dodge, 89 Tex. 69, 70–71, 32 S.W. 514, 515 (1895) (“Undoubtedly, the board of directors can appoint agents, whether in the form of committees or as single agents, to transact the ordinary business of the corporation; but we believe that the rule is well settled by authority, and sustained by sound principle, that a board of directors cannot confer upon others the power to discharge duties imposed upon them which involve the exercise of judgment and discretion, except in the transaction of the ordinary business of the corporation, unless authorized so to do by the charter.”); San Antonio, Joint Stock Land Bank v. Taylor, 129 Tex. 335, 342, 105 S.W.2d 650, 654 (1937) (“The rule is generally accepted that the president of a corporation may be intrusted by the board of directors with the management of the business of such corporation, and he may perform for the corporation the business it is authorized to transact.”); Helms v. Home Owners' Loan Corp., 129 Tex. 121, 131, 103 S.W.2d 128, 134 (1937) (“A general manager may do ‘everything in the transaction of the business of the corporation that the corporation could itself do in its routine and daily business.”).
Texas courts required a reasonable application of the ultra vires doctrine. Stephens County v. J.N. McCammon, Inc., 122 Tex. 148, 156, 52 S.W.2d 53, 56 (1932) (“The doctrine of ultra vires ought to be reasonably understood and applied.”). Texas courts required limited ultra vires relief to stockholders and the state. Staacke v. Routledge, 111 Tex. 489, 501, 241 S.W. 994, 999 (1922) (“The general rule is that the question of whether or not a corporation has acted in excess of its lawful powers can only be raised by one interested in the corporation, or in a direct proceeding brought by the state, either to forfeit the charter or to subject it to punishment for the unlawful act.”). Texas courts shielded shareholders and officers from liability to third parties arising from ultra vires acts of the corporation. Id at 500, 241 S.W. 994, 999 (“The doing of such an ultra vires act would not make the plaintiffs in error, as stockholders or officers of the company, liable personally for the acts of the corporation.”). Texas common law also eliminated the abuse of the ultra vires doctrine by preventing corporations from asserting it to escape contracts after receiving benefits. Texas W. Ry. Co. v. Gentry, 69 Tex. 625, 632, 8 S.W. 98, 102 (1888)(“When the contract is executed, and the corporation has received the benefit, the weight of authority seems to be that the corporation should be held estopped to deny its authority to make it.”); Kincheloe Irr. Co. v. Hahn Bros. & Co., 105 Tex. 231, 236, 146 S.W. 1187, 1189 (1912) (“It may be stated as a rule of law that an action for damages for breach of contract will not be avoided by the plea of ultra vires, when the corporation has received benefits under the alleged illegal contract. In such a case, and under such circumstances, the corporation is estopped from denying its power to make the contract.”). Texas courts also developed common-law alter ego doctrines to pierce the corporate veil. Humble Oil & Ref. Co. v. R.R. Comm'n of Texas, 133 Tex. 330, 335–36, 128 S.W.2d 9, 12 (1939) (“The rule is well settled that courts will look through the forms to the realities of the relationship between two or more corporations in order to determine whether each is a separate entity or corporation; or whether their commingled affairs are such as to constitute them one integrated and single business enterprise; or whether, through intercorporate setup, affiliation, or stock ownership, the purpose is to control the subsidiary corporation or corporations so that they are used as the mere instrumentalities or agents of the owning corporation or corporations.”).
In the area of shareholder rights, Texas courts took seriously the constitutional mandate that Texas law “provide fully for the adequate protection … of the individual stockholders.” Tex. Const. art. XII, § 2. See Shaw v. Lone Star Bldg. & Loan Ass’n, 123 Tex. 373, 382, 71 S.W.2d 863, 867 (Comm’n App. 1934) (“Our Constitution provides, section 1 of article 12, that no private corporation shall be created, except by general law. Section 2 of article 12 of our Constitution provides, in effect, that the Legislature shall enact general laws providing for the creation of private corporations. This section of the Constitution then expressly provides that such laws shall provide fully for the adequate protection of the public and the stockholders.”). Texas common law recognized that stock is personal property. See Auto. Mortgage Co. v. Ayub, 266 S.W. 134, 135 (Tex. Comm. App. 1924, jmt adopted) (“While not negotiable, shares are freely assignable, and in this respect resemble negotiable choses in action and tangible property rather than other nonnegotiable choses in action.”). Texas common law recognized “the property right which a share in such a company creates.” Yeaman v. Galveston City Co., 106 Tex. 389, ___ 167 S.W. 710, 719 (1914). The corporation may not interfere with those property rights. Id. at 720 (“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.”). See also Nicholson-Watson Shoe & Clothing Co. v. Urquhart, 32 Tex. Civ. App. 527, 530, 75 S.W. 45, 47 (1903, writ ref’d) (the corporation’s “attempted forfeiture of appellee’s stock … was absolutely void, and, as before intimated, can only be taken as evidence against appellant of its conversion”). The Texas Supreme Court held that a shareholder’s ownership rights were independent from the issuance of the share certificate and broader than the description of such rights in the early Texas corporations statutes. The shareholder’s property rights arose from his investment in the corporation, regardless of the corporation’s formal recognition of those rights. Id. at 421, 167 S.W. at 720 (“No principle of law is better settled than that which affirms that the payment of his subscription by an original subscriber to the capital stock of a corporation constitutes him a stockholder, and that, as before stated, regardless of the issuance of any certificate.”). The stock certificate is not the stock itself, but merely a “muniment of title” and is not necessary for complete ownership of the stock. Id. at 419, 167 S.W. at 720 (“In a corporation the certificate of stock is not the stock itself; it is but a muniment of title, an evidence of the ownership of the stock. It is not necessary to a subscriber's complete ownership of the stock.”). See also Rio Grande Cattle Co. v. Burns, 82 Tex. at 56, 17 S.W. at 1045 (“To secure his interest therein no formal issuance of a certificate was therefore necessary.”). Among the property rights of stock ownership was free transferability. Rio Grande Cattle Co. v. Burns, 82 Tex. at 56, 17 S.W. at 1045 (“His interest in the corporation was fixed, and he had the right to transfer his stock. …The interest of Glasscock was clearly assignable, and his assignment thereof to the appellee, under the circumstances, vested at least the equitable title to the stock or interest of Glasscock in the appellee, and entitled it to demand recognition at the hands of the corporation.”).
The Court also held that the corporation was the “custodian of the rights of the stockholders” and that the stockholders had legal claims against the corporation for interference with their ownership rights, such as the “illegal issuance of stock to their prejudice.” Strange v. Houston & T.C.R. Co., 53 Tex. 162, 168 (1880) (“The company is to a certain extent the custodian of the rights of the stockholders, and is responsible for an illegal issuance of stock to their prejudice.”). The Court imposed equitable remedies in favor of shareholders to protect against illegal attempts to forfeit their shares. See Yeaman v. Galveston City Co., 106 Tex. at 425, 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.”); <>emBaker v. Wasson, 53 Tex. 150, 156 (1880) (“The company only, had the power to cancel the old stock and issue new, and if this was done illegally and wrongfully, whether through negligence or fraud, Wasson, if the true owner of the old stock, had his remedy by suit against it.”).
The Texas Supreme Court held that stockholders, including transferees that the corporation refused to acknowledge, had an election of remedies either to compel corporate recognition of their rights and issuance of the share certificates or to recover damages in assumpsit for the value of their shares based on the theory that the corporation’s failure to recognize the shareholder’s rights was the equivalent of converting the shares. Baker v. Wasson, 59 Tex. at 145–46 (“An equitable action to compel the company to issue a new certificate of stock to W. T. Wasson could be maintained where an adequate remedy at law for damages would not exist; but the injured person has his election of remedies, and it is not for a wrong-doer to prescribe to him what his remedy shall be. After a conversion the value of stock might be so much diminished that new certificates would give no adequate compensation; or to require a new issue of the stock might, in cases like this, where shares have gone into the hands of innocent purchasers, involve an overissue of stock, which would be illegal, or otherwise an innocent purchaser suffer.”); Rio Grande Cattle Co. v. Burns, 82 Tex. at 57, 17 S.W. at 1046 (“That plaintiff, after having acquired the title to the Glasscock interest, applied to the company for a transfer of the stock on the company's books, and for a certificate for the amount of stock; that the corporation refused to grant either of these requests, or to recognize any right of plaintiff in the corporation, or to the stock. That these acts amount to a conversion under the law is well settled by the authorities, and that thereupon it was at the election of the plaintiff to have either sued for specific performance, or in assumpsit upon the case for damages, the measure of which would ordinarily be the market value of the stock converted. The plaintiff pursued practically, though not technically, (being unnecessary under our system,) the latter course, and recovered the value of the stock.”). To deal with potential corporate liability when share ownership was unclear, the Texas courts developed flexible rules governing situations in which the certificate was lost, allowing the corporation on the one hand to require the shareholder to provide indemnification or post security to protect the corporation from conflicting claims of ownership, while protecting the shareholder, on the other hand, from overreaching by the corporation. See Galveston City Co. v. Sibley, 56 Tex. 269, 278–79 (1882) (“it is deemed proper in this case to adopt the practice, somewhat novel with us, but analogous to the proceedings of courts of chancery elsewhere, to require that this case remain open on the docket below until from lapse of time or otherwise the rights of the parties shall be so established that the case may be finally dismissed without prejudice to either party.”).
The Texas Supreme Court developed the doctrine that the corporation was a “trustee” as to the rights and interests of its shareholders and owed a legal “obligation to observe its trust for their benefit.” Yeaman v. Galveston City Co., 106 Tex. at 425, 167 S.W. at 723 (“It is a trustee for the interests of its shareholders in its property, and is under the obligation to observe its trust for their benefit.”). The trustee duties extended to all beneficial owners, not only to stockholders of record. Green v. Galveston City Co., 191 S.W. 182, 185 (Tex. Civ. App.—Galveston 1916, writ ref'd).
Texas common law held that stockholders have distinct ownership rights that are of “judicial cognizance.” Moroney v. Moroney, 286 S.W. 167, 169 (Tex. Comm’n App. 1926) (“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.”). These rights are not granted by the corporation but are created by the law. Yeaman v. Galveston City Co., 106 Tex. at 420, 167 S.W. at 720 (“It is to make the standing as stockholders of such original investors dependent more upon the possession of a proper certificate, the mere evidence of their right, than the right itself, and to deprive them of the benefits of the relation which, in virtue of the acceptance of their investment, for this known and recognized purpose, the law creates, rather than the stock company or the corporation imposes.”). Among these rights are the right “to meet at stockholders’ meetings, to participate in the profits of the business, and to require that the corporate property and funds shall not be diverted from their original purpose,” and to receive “to a certificate for his stock, to transfer it on the company’s books, and to inspect these books.” Forbes v. Memphis, E P & P R Co, 9 F. Cas. 408, 411 (C.C.W.D. Tex. 1872) (“The rights of a stockholder are to meet at stockholders' meetings, to participate in the profits of the business, and to require that the corporate property and funds shall not be diverted from their original purpose. If the company become insolvent, it is the right of the stockholders to have the property applied to the payment of its debts. I do not know of any other rights except incidental ones, subsidiary or auxiliary to these. Of course, a stockholder has ordinarily a right to a certificate for his stock, to transfer it on the company's books, and to inspect these books. For the invasion of these rights by the officers of the company, he may sue at law or in equity, according to the nature of the case.”
Texas courts developed the common law right to inspect corporate records if done in good faith and for a proper purpose. See, e.g., Moore v. Rock Creek Oil Corp., 59 S.W.2d 815, 817 (Tex. Comm'n App. 1933) (“At common law the right of inspection was not an absolute one. Under this rule the stockholder was compelled to establish that the inspection was asked in good faith and for an honest purpose.”); Falfurrias Immigration Co. v. Spielhagen, 61 Tex. Civ. App. 111, 118, 129 S.W. 164, 167 (1909, no writ) (“officers and directors of said corporation have refused to allow [shareholder] to inspect and examine the books, records, and papers of the corporation” as supporting appointment of a receiver for corporation.); Dreyfuss & Son v. Benson, 239 S.W. 347, 349 (Tex. Civ. App.—Dallas 1922, writ ref'd) (recognizing “the common-law rule requiring a stockholder of a corporation who seeks access to its records to prove good faith”); Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. Civ. App.—Amarillo 1930, writ ref'd) (“The right of inspection is grounded upon the proposition that those in charge of the corporation are merely the agents of the stock holders who are the real owners of the property and that the owners are entitled to information as to the manner in which the corporate business is conducted. The property of a corporation, although subject under some conditions to rights of creditors, in the last analysis is that of the stockholder and when one seeks an inspection of its books, records or property, he is in reality but seeking an inspection of his own and that this should be accorded fully, freely and at all times when such inspection will not unreasonably inconvenience others who have a like interest in and rights to the property and that the attempt unreasonably to hamper such inspection by officers, managers or others is an unjust exercise of power and one which courts should not sanction. He is entitled to this right in order that he may ascertain whether the affairs of the corporation are properly conducted and that he may vote intelligently on questions of corporate policy and management. It is not necessary that the stock holder should first show that there is mismanagement where he wishes to make the examination in good faith for the purpose of seeing whether the affairs of the corporation are properly managed.”); Smith v. Trumbull Farmers Gin Co., 89 S.W.2d 829, 830 (Tex. Civ. App.—Waco 1936, no writ) (“We do not deem it necessary in this case to distinguish between the right of inspection so given and such right as accorded by the rules of the common law. …The courts generally, both in jurisdictions recognizing the right of inspection of corporate books and records by a stockholder, as guaranteed to the stockholder by the common law, and those in jurisdictions which have statutes relative to the situation, hold that the right is limited to inspection at reasonable times. Otherwise, of course, a stockholder would not only be in a position to make a nuisance of himself in making repeated demands to see the corporation's books, but could seriously affect the interests of other stockholders by impeding the management of the corporation.” Texas shareholders also have the right to confront management. Grayburg Oil Co. v. Jarratt, 16 S.W.2d 319, 320 (Tex. Civ. App.—El Paso 1929, no writ) (“We can see no good reason why a stockholder in a corporation who is dissatisfied with the internal management of the corporate affairs should not have the right to call to the attention of his fellow stockholders conditions in the corporate management with which he is dissatisfied and in good faith regards as prejudicial to the best interest of the corporation and its stockholders. In our opinion, stockholders have such right.”).
Chief among the common-law rights of shareholders was the right to participate in profits of the corporation through the receipt of dividends. Moroney v. Moroney, 286 S.W. at 169 (“Indeed, 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. The chief value of corporate stock is its right to receive dividends.”). That right arises from the corporation’s duties as the trustee for the rights of its stockholders. Yeaman v. Galveston City Co., 106 Tex. at 426, 167 S.W. at 724 (“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 rpofits or dividends upon his stock.”); Moroney v. Moroney, 286 S.W. at 169 (“And where a stockholder is entitled to force payment of a dividend, the right does not arise from any actual contract between the corporation and its stockholders, but rather from the nature of the organization, and the relation of the stockholders to the corporation and its property.”). When the corporation pays a dividend, it becomes indebted and accountable to every shareholder for each shareholder’s proportionate share. McCord v. Nabours, 101 Tex. 494, 503, 109 S.W. 913, 917 (1908), opinion modified on reh'g, 101 Tex. 494, 111 S.W. 144 (1908) (“In this case the plaintiffs made the Oil Mill Company a party to the suit in which the stock was in litigation, and this was a demand and notice that the dividends were claimed by the plaintiffs; besides, the petition sought to have the mill company enjoined from paying over the dividends, but it does not appear that any injunction was issued and served. We think that there can be no doubt that the Oil Mill Company was properly chargeable with the dividends which it paid out after it was made a party to the suit.”); Yeaman v. Galveston City Co., 106 Tex. at 426, 167 S.W. at 724 (“The debt which a declared dividend creates on the part of the corporation to the stockholder is one payable only on demand, as is the obligation of a bank to its depositors. It is not subject to limitation until there has been a demand upon the corporation and a refusal to pay.”).The corporation is deemed to hold all unpaid dividends in trust for its shareholders. Yeaman v. Galveston City Co., 106 Tex. at 426–27, 167 S.W. at 724 (“Though considered a debt, as a shareholder's dividends are payable by the corporation only on demand, its holding of them until the demand is in the nature of a trustee relation; and in our opinion the same rule which requires notice to a cestui que trust of the trustee's repudiation of the trust, to set limitation in motion against him, should govern in the case of a conversion by a corporation of dividends belonging to one of its stockholders.”). Such dividends are payable on demand, and limitations will not run until demand is made and refused. Id. at 426, 167 S.W. at 724 (“He is under no obligation to draw or demand his dividends within any prescribed period. He may leave them with the corporation, if he chooses, and be under no default. The debt which a declared dividend creates on the part of the corporation to the stockholder is one payable only on demand, as is the obligation of a bank to its depositors. It is not subject to limitation until there has been a demand upon the corporation and a refusal to pay.”). Moreover, the corporation may not defeat the right to dividends by postponing their declaration indefinitely. Dealers' Granite Corp. v. Faubion, 18 S.W.2d 737, 740 (Tex. Civ. App.—Austin 1929, no writ) (“A corporation cannot defeat, or postpone indefinitely the payment of, an obligation contingent upon its earning net profits from its business, by putting back into improvements, which enhance the value of its properties, receipts or income which would otherwise become net earnings and thus avoid ever creating a surplus fund from which to pay such obligation.”).Even when dividends are not declared, the courts may use their equitable powers to declare excess funds set aside by the corporation to be the property of the shareholders. Moroney v. Moroney, 286 S.W. at 169–70 (“Now, it is not essential to the right to receive a dividend that there should have been a formal declaration of a dividend, but where the corporation sets apart a fund for distribution to its stockholders to such extent as to become segregated from the property of the corporation, such property henceforth becomes, equitably, the stockholders' property.”). And in a proper case, a court of equity may compel the declaration of dividends. Id. at 169 (“So important is this right that courts of equity will, in a proper case, compel a payment of dividends. And where a stockholder is entitled to force payment of a dividend, the right does not arise from any actual contract between the corporation and its stockholders, but rather from the nature of the organization, and the relation of the stockholders to the corporation and its property.”).
The Texas Supreme Court also developed common law rights to dissent to a merger of the corporation, with a mandatory buy-out remedy, prior to the statutory development of rights of dissent and the appraisal remedy. See Int'l & G.N.R. Co. v. Bremond, 53 Tex. 96, 120 (1880) (“Appellants claim that the value of that interest was indicated by the market value of the stock, and that Bremond's recovery should have been limited to that market value. It appears, however, that the subscribers to the Houston & Great Northern Railroad Company were not entitled to stock certificates until their subscriptions were fully paid, and that only forty per cent. of the subscription had been called for or paid by any subscribers, and consequently no stock had issued. In this state of affairs it might well be that sales by subscribers were too rare to give the stock a market value. The inquiry should have extended to the actual value of stock, and as tending to show that value, the defendants were at liberty to show the true assets and liabilities of the Houston & Great Northern Railroad Company.”). One commentator noted: “This case is the only Texas decision prior to the adoption of the Business Corporation Act dealing with a party that can be analogized to a dissenting shareholder. It should be noted that the relief granted is identical to the recovery permitted under the appraisal procedure.” Howard Wolf, Dissenting Shareholders: Is the Statutory Appraisal Remedy Exclusive?, 42 TEX. L. REV. 58, 63 (1963).
Early Texas common law also vigorously imposed fiduciary duties on corporate management. See Tobin Canning Co. v. Fraser, 81 Tex. 407, 413, 17 S.W. 25, 28 (1891) (“When a director so purchases the property, and refuses to account for the same or its value, he is chargeable with the property or its value, with the profits or interest accruing therefrom, as a trust fund for the use and benefit of the corporation, its creditors and stockholders.”); San Antonio St. Ry. Co. v. Adams, 87 Tex. 125, 131, 26 S.W. 1040, 1042 (1894) (“A director is without authority to act as such in a matter in which his interest is adverse to that of the corporation.”); Tenison v. Patton, 95 Tex. 284, 291–92, 67 S.W. 92, 94 (1902) (“It is firmly established that such directors and trustees occupy towards the company and its shareholders a fiduciary relation which brings them within the operation of equitable principles; and it has been frequently laid down in the broadest terms that, such is the duty of each of them to give to the company his disinterested efforts in promoting its interests, a purchase from or sale to it by one of them may be avoided, at its option, whether the transaction be fair or not, and although the corporation were represented by other directors who would be competent to act for it in the same kind of a transaction with one not connected with the company. It is said that each director is under obligation in such transactions to give to his associates the benefit of his unbiased aid and counsel, and that he cannot devest himself of this duty, nor be released from it by his co-trustees.”); Scott v. Farmers' & Merchants' Nat. Bank, 97 Tex. 31, 46, 75 S.W. 7, 9 (1903) (“A director of a corporation cannot act for it in a matter in which he has an adverse interest.”); Greathouse v. Martin, 100 Tex. 99, 102, 94 S.W. 322, 324 (1906) (“When the proof showed that the action of the board of directors was not binding upon the corporation, the plaintiff was entitled to recover from Martin the money which had been paid to him under that invalid order, unless Martin could show himself entitled to retain it by reason of the fact that he had performed valuable services to the corporation for which he would be entitled to just compensation. Martin desired the court to enter judgment establishing his right to reasonable compensation for servises rendered under the invalid contract. The burden was on him to prove their value. Having introduced no evidence whatever as to the reasonable value of the services rendered by him, the Court of Civil Appeals had no basis upon which to render any judgment in his favor after it had found, as we think it was justified in doing, that the order of the board of directors fixing his salary was unlawfully obtained by him, and constitutes no lawful basis for a claim on his part to be remunerated for the services rendered.”).
The cause of action for breach of those fiduciary duties belonged to the corporation, not to the shareholder. Evans v. Brandon, 53 Tex. 56, 60 (1880) (“On principle and authority, it is clear that the liability of directors for a breach of duty that injures the corporate property as a whole, is primarily to the corporation whose agents they are.”). However, this situation often created a problem, as the Texas Supreme Court noted: “The unusual growth and development of corporate enterprises resulted in many frauds, breaches of trust, and illegal acts upon the part of directors of corporations, the effect of which was to defraud the stockholders. In many instances it was found that the guilty parties controlled the board of directors as well as a majority of the stock. For this reason no suit would be instituted by the corporation to right the wrong done to the minority stockholders.” Pratt-Hewit Oil Corp. v. Hewit, 122 Tex. 38, 43–44, 52 S.W.2d 64, 65 (1932). Therefore, Texas common law developed the equitable remedy of a derivative action, permitting corporate claims to be asserted by individual shareholders for the benefit of the corporation. Mussina v. Goldthwaite, 34 Tex. 125, 132 (1871) (“an individual stockholder may maintain a petition in equity against the directors of a corporation for misconduct in office, where the corporation is unable to bring a suit at law, or where, through collusion or fraud, it neglects to seek redress, and an application has been made to the directors for the use of the corporate name, to bring suit, which has been refused.”); Evans v. Brandon, 53 Tex. at 60 (“If the corporation refuses to sue, or is still under the control of the directors sought to be held responsible, a stockholder may maintain an equitable proceeding “to protect the interest of the corporation as the trustee for all its stockholders and creditors.”); Cates v. Sparkman, 73 Tex. 619, 620–21, 11 S.W. 846, 848–49 (1889) (“To justify the interposition of the courts there must exist, as a foundation for such suit, some action,-a threatened action of such board or officers which is beyond the power conferred by its charter,-or such fraudulent transaction completed, contemplated among themselves, or with others, as will result in serious injury to the stockholders suing. Where the directors or officers, or some of them, cause a loss of corporate property by negligence or culpable lack of prudence, or a failure to exercise their functions, or fraudulently misappropriate the corporate property in any manner, or obtain any undue advantage, benefit, or property for themselves by contract, purchase, sale, or other dealings under cover of their official functions, or in any manner commit a breach of their obligations, then the corporation is the party to bring the suit in equity; and whatever be the nature of the wrong in cases of this character, whether intentional or fraudulent, or resulting from carelessness, negligence, or imprudence, and whatever may be the indirect loss occasioned to individual stockholders, no equitable suit against the wrong-doing directors or officers for relief can be maintained by an individual shareholder suing representatively for all others similarly situated, unless the corporation, either actually or virtually, refuses to prosecute.”); Becker v. Directors of Gulf City St. Ry. & Real Estate Co., 80 Tex. 475, 487, 15 S.W. 1094, 1098 (1891) (“Thus, if the agents of a corporation, in whom the authority to direct its litigation is vested, are themselves guilty of a wrong against the corporation, a court of equity will interfere at the suit of a stockholder to protect his interest in the corporation, without requiring him first to request the guilty agents to proceed in the name of the corporation against themselves; for a demand would ordinarily be nugatory under these circumstances; and it would be wholly contrary to established principles of justice to permit the authors of a wrong to conduct a litigation against themselves, as agents of the injured complainants.’ Plaintiffs therefore appear to have already done more than they were required to do.”); Favorite Oil Co. of Beaumont & Cleburne v. Jef. Chaison Townsite Co., 162 S.W. 423, 424 (Tex. Civ. App.—Galveston 1913, no writ) (“It is a well-recognized exception to the general rule that during the life of the corporation it, and not the stockholders, is the legal owner of its property, and it alone can sue for the enforcement of its rights, that such suit may be prosecuted by a stockholder, suing for the benefit of himself and other stockholders, when the proper officers of the corporation whose duty it is to prosecute such action refuse to do so, and it appears to be necessary to the ends of justice that such action be prosecuted.”).
While Texas courts held that a demand on the corporation was necessary before a shareholder could proceed in a representative capacity, the courts also developed the demand futility doctrine that held no such demand would be necessary if it would have been “useless.” Cates v. Sparkman, 73 Tex. at 621, 11 S.W. at 849 (“The rule referred to, that it must be shown that the corporation refuses to sue, does not obtain where the allegations of the bill show that such request would have been useless, or if they show such facts as are tantamount to a ‘virtual refusal’ to sue: as, where the fact of the complicity in the alleged fraud by the controlling officers of the company appears from the averments, so that the application would be unavailing, it need not be formally alleged to have been made, or that the present board connived at and approved of the act complained of, which the stockholder sought to impeach, it was held to be a sufficient excuse for not applying to the company.”). As a guard against potential abuse, the Texas common law also developed the business judgment rule, recognizing that the law protected the power of discretion afforded to corporate management. Id. at 620–21, 11 S.W. at 848 (“It may be safely said that courts of equity have not, as a general rule, been disposed to exercise their jurisdiction through suits like the present to control or interfere in the management of the corporate or internal affairs of an incorporated company. The company's business is left to the direction of the officers or managing board which, by the law creating it, may be clothed with the power and discretion to conduct its affairs in the manner which, in their judgment, is best calculated to promote its interests. To justify the interposition of the courts there must exist, as a foundation for such suit, some action,-a threatened action of such board or officers which is beyond the power conferred by its charter,-or such fraudulent transaction completed, contemplated among themselves, or with others, as will result in serious injury to the stockholders suing.”). Texas law prohibits claims against management based on mere mismanagement or negligence. Id. at 622, 11 S.W. at 849 (“The breach of duty authorizing a suit by an individual stockholder for damage in the depreciation of his stock does not refer to mere mismanagement or neglect of the officers or directors in the control of the corporate affairs, or the abuse of discretion lodged in them in the conduct of the company's business. On this ground the courts do not interfere.”). Texas law does not accept complaints based merely on imprudent or unwise decisions. Id. at 622, 11 S.W. at 849 (“But, if the acts or things are or may be that which the majority of the company have a right to do, or if they have been done irregularly, negligently, or imprudently, or are within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved, these would not constitute such breach of duty, however unwise or inexpedient such acts might be, as would authorize the interference by the courts at the suit of a stockholder.”).
Nevertheless, Texas common law continued to protect the right of individual shareholders to bring direct claims for violations of their individual rights as shareholders. See Henderson v. San Antonio & M.G.R. Co., 17 Tex. 560 (1856) (“The individual members of an incorporated company are deemed strangers to the artificial body created by the act of incorporation, and may maintain their rights of action, of whatever nature, against the company, in the same manner as those who are not members.”). Individual shareholders could maintain a direct action in their individual capacity for “wrongful acts which are not only wrongs against the corporation but also violations of duties arising from contracts or otherwise and owing directly to the injured stockholders.” Stinnett v. Paramount-Famous Lasky Corp. of New York, 37 S.W.2d 145, 149 (Tex. Comm’n App. 1931). The type of conduct that gives rise to such a claim “is that which is characterized by ultra vires, fraudulent, and injurious practices, abuse of power, and oppression on the part of the company or its controlling agency clearly subversive of the rights of the minority, or of a shareholder, and which, without such interference, would leave the latter remediless.” Cates v. Sparkman, 73 Tex. at 622, 11 S.W. at 849; see also Pratt-Hewit Oil Corp. v. Hewit, 122 Tex. at 44–45, 52 S.W.2d at 66 (“The statute does not in terms prohibit stockholders from obtaining relief from fraudulent and oppressive acts of the directors. Most assuredly the courts will not by construction extend its operation so as to prevent the stockholders from redressing wrongs which injuriously affect their right and interest in the corporate assets. Our attention has not been called to the decision of any court wherein it has been decided that a statute of this character can be used as a shield by corporate directors to ward off an attack, in a court of equity, upon a fraudulent scheme of the directors to defraud stockholders of their interests in the corporate property.”).
Modern Texas Corporations Statutes
The modern era of business forms in Texas began in approximately 1950, when the need to modernize the Texas corporation statutes became apparent. This realization led to the enactment of the Texas Business Corporation Act (TBCA) in 1955—the basic statute that was applicable to general business corporations in Texas for over a half-century. E. Miller & R. Ragazzo, 19 Tex. Prac., Business Organizations § 1:2. Among highly important provisions differing from the 1874 Act, the TBCA authorized multiple corporate purposes, perpetual duration, repurchases of a corporation’s own shares, redemption of shares, different classes of shares (including shares whose terms could be fixed by directors), restrictions on share transfers, classification (staggering) of directors, executive committees of directors, actions by unanimous shareholder consent without a meeting, appraisal rights for shareholders dissenting from mergers and certain other corporate actions, and major actions, such as merger, consolidation, asset sales and dissolution, on approval of directors and 4/5ths shareholder vote:, abolished (with minor exceptions) the ultra vires doctrine, provided cumulative voting of shares unless denied in the charter, made the directors’ determination of the value of property received for shares conclusive in the absence of fraud, and set detailed limits on the payment of dividends and other distributions. Bromberg, supra at 103-04.
According to Professor Bromberg: “Texas was slow in developing its business organization laws. The pace quickened in the last half of the 20th century and accelerated rapidly in the last two decades of that period. In the main, the state has been a follower, not a leader in this kind of legislation. As a follower, its models have usually been Uniform Acts, which have a degree of national consensus, or Delaware, which is most responsive to business needs.” Bromberg, supra at 136-37.
Business Organizations Code
On May 29, 2003, the Business Organizations Code was signed into law by Governor Perry and effected a major, but largely nonsubstantive, revision of the Texas business organization statutes, substituting a “hub and spoke” structure for all business entities in place of separate free-standing statutes for each type of business form. Miller & Ragazzo, 19 Tex. Prac., Business Organizations § 2:1. According to the Code, the purpose was to make the law “more accessible and understandable by: (1) rearranging the statutes into a more logical order; (2) employing a format and numbering system designed to facilitate citation of the law and to accommodate future expansion of the law; (3) eliminating repealed, duplicative, expired, executed, and other ineffective provisions; and (4) restating the law in modern American English to the greatest extent possible.” BOC Sec. 1.001. The Code was phased in, applying to all corporations created after January 1, 2006, and to all corporations after January 1, 2010. Sec. 401.001. The Business Organizations Code now supplants all prior statutory corporations laws. Tex. Bus. Orgs. Code Ann. § 402.006 (“Except as otherwise expressly provided by this title, all of the provisions of this code govern acts, contracts, or other transactions by an entity subject to this code or its managerial officials, owners, or members that occur on or after the mandatory application date. The prior law governs the acts, contracts, or transactions of the entity or its managerial officials, owners, or members that occur before the mandatory application date.”).