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Share Cancellation

Conversion Tort Definition: Share Cancellation

A corporation may exercise dominion and control over stock in many ways. Cancellation of the shares is the most obvious: the very definition of the stock conversion tort.

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Conversion Tort Definition:

Wrongful Dominion or Control Over Your Stock

Stock is a uniqued kind of property. The corporation physically possesses and exercises control over the stock; the shareholder is not capable of doing so. The corporation holds the stock in trust for the benefit of the stockholder. Ultimately, stock ownership is a matter of the corporation's acknowledgement of the shareholder's rights. The law imposes a duty on the corporation to acknowledge and preserve the stockholder's ownership and not to attempt to impair his interests.

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Applied to Stock

Conversion Tort Definition Applied to Stock

Because the essence of stock ownership is the corporation's acknowledgement of who the owner is, the way a corporation converts a shareholder's stock is simply to not acknowledge his ownership. In Yeaman v. Galveston City Co., although not dealing with the conversion tort definition, the Texas Supreme Court referred to the corporation's failure to acknowledge the ownership of the heirs of one of its founding shareholders as an "appropriation" of their stock. There are many ways in which such an "appropriation" of a shareholder's stock might manifest itself. The most obvious example would be a case in which the plaintiff is undeniably acknowledged as a shareholder, and then the corporation wrongfully cancels those shares on the corporate books.

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In Gulf States Abrasive Manufacturing Inc. v. Oertel, the plaintiff was issued 25,000 shares to set up the company and get it into production. The plaintiff also executed a $25,000 promissory note that was to be paid through future bonuses. Apparently, dissension arose among the shareholders, and the plaintiff quit and started a competing company. In response, the company cancelled the plaintiff’s shares, and the plaintiff sued for conversion. The company maintained that the shares had been issued in consideration for the note, which had only been reduced $3,400 at the time he terminated his employment. Under then existing law, a promissory note did not constitute valid consideration. Therefore, the company contended that the shares were void from the outset, had been prematurely issued, and that the company had appropriately cancelled the stock upon “discovery of the issuance of the certificate in error.” The trial court found otherwise. “In response to Special Issue No. 1 the jury found that the 25,000 shares in question had been issued to Oertel in exchange for his work and expertise, contributed prior to issuance of the stock on September 28, 1965, in organizing the company and getting its product on the market.” The jury was not required to answer any other questions —meaning that, having found that the plaintiff owned the stock, the court found the remaining elements of conversion as a matter of law. Damages of $2 per share were awarded based on the report of a special master, appointed by agreement. The company objected that the bylaws, which had been approved by the plaintiff, set the price at $1 per share. The bylaws provided the company with the option to purchase the shares of any shareholder upon separation from the company for that price (an option the company had not exercised), but the court of appeals held that the bylaws were irrelevant to the issue of damages for conversion: “[T]he trial court's judgment fixes the damages based on the value of the shares; it does not order a sale of them.”

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