Fiduciary Duty Liability for Stock Conversion

Majority Shareholder Fiduciary Duty Liability for Stock Conversion

How the law governing the stock conversion cause of action creates indirect majority shareholder fiduciary duty liability

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Majority Shareholder Joint and Several Liability Arising from the Corporation's Fiduciary Duty.

Because the corporation owes a fiduciary duty to its shareholders with regard to their share ownership, the majority shareholder will typically face personal liability in stock conversion cases. The corporation's fiduciary duty affects the application of the conversion tort in several ways, including the use of minority discounts in computing damages and tolling of limitations. Texas law imposes joint and several liability on persons who "knowingly participate" in a breach of fiduciary duty, even if they owe no duty personally to the victim. As we noted in exploring the minority shareholders, breach of trust cause of action, majority shareholders causing the breach of the corporation's fiduciary duties will face personal liaibility to the minority shareholder. Likewise, majority shareholders who cause the corporation to convert a plaintiff's stock will also face personal liability for the corporation's breach of its fiduciary duty to the plaintiff.

In stock conversion cases, the wrongful action by the corporation is almost always caused by the majority shareholder who is trying to get rid of the minority shareholder for personal gain. An award against only the corporation may work an injustice to the plaintiff if the majority shareholder has already taken all the money or to other innocent shareholders if he has not. However, even though the corporate entity is the proper defendant in stock conversion cases, in almost every stock conversion case decided in Texas, the controlling shareholder is also held individually liable.

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Texas Courts Routinely Enforce the Majority Shareholder's Fiduciary Duty Liability in Conversion Cases

In some cases, the act on which the conversion claim is based was actually committed by the majority shareholder in his capacity as officer. Corporate agents are individually liable for their own torts, even when acting in the course and scope of their agency. “A corporate officer who converts the property of another to the use of the corporation, or who misapplies private funds in the hands of the corporation is personally liable to the person whose property or funds have been so misappropriated.” Other cases hold individual defendants jointly and severally liable with the corporation based on an aiding and abetting or knowing
participation theory. A corporate officer may be held individually liable for conversion by the corporation, “if he participated in, or had knowledge of and assented to, the wrongful conduct.” In Sandor Petroleum Corp. v. Williams, the court of appeals affirmed a conversion of stock judgment against director who voted for invalid stock transfer restrictions. Finally, where the conversion of stock by the corporation resulted from an agreement by two or more individuals, such as two directors, courts have upheld judgments against the individuals based on civil conspiracy.

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