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shareholder suit

Rediscovering the individual shareholder suit

Shareholders have individual property rights, and corporations owe quasi-fiduciary duties to each shareholder. Rediscovering the individual shareholder suit.

Resources For Small Business Owners
Serving The Woodlands

Shareholder Suit

The Individual Shareholder Suit

The Texas Supreme Court has long recognized that conduct that harms shareholders in a corporation usually does so only indirectly--that is, the corporation suffers a loss, and all the shareholders then also suffer their proportionate share of the loss. Because the law considers the corporation to be a person, separate and apart from its shareholders, the party with the right to seek redress for such an injury is the corporation, not the individual shareholders.

Ordinarily, the cause of action for injury to the property of a corporation or the impairment or destruction of its business, is vested in the corporation, as distinguished from its stockholders, even though it may result indirectly in loss of earnings to the stockholders. Generally, the individual stockholders have no separate and independent right of action for injuries suffered by the corporation which merely result in the depreciation of the value of their stock. This rule is based on the principle that where such an injury occurs each shareholder suffers relatively in proportion to the number of shares he owns, and each will be made whole if the corporation obtains restitution or compensation from the wrongdoer.

The former shareholder oppression doctrine was an exception. The shareholder oppression cause of action was a shareholder suit by an individual shareholder seeking to remedy the harm to that shareholder caused by oppressive conduct committed by the majority through its control over the corporation.

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Ritchie v. Rupe

Loss of the Shareholder Suit in Ritchie v. Rupe

The Texas shareholder oppression doctrine was a direct claim asserted by individual shareholders. The Texas Supreme Court in Ritchie v. Rupe struck down the shareholder oppression doctrine, reasoning that most examples of oppressive conduct were really acts that injured the corporation and thus individual shareholders were adequately protected by actions brought by the corporation (or on behalf of the corporation through a derivative suit) to remedy the specific misconduct. The Supreme Court left “the legitimate interests of a minority shareholder” to be safeguarded only “by protecting the well-being of the corporation."

Business Law
Serving The Woodlands

Rediscovering Individual Shareholder Causes of Action

We have argued that this aspect of the Ritchie opinion ignores the purpose and primary effect of oppressive conduct and that the absence of duties to individual shareholders and the absence of individual shareholder remedies leave a serious gap in the law. We have analyzed and explored fundamental shareholder rights that arise from the law of property as applied in the corporate context, such as the right to voice, information, share in profits, and transferrability, and we have analyzed the quasi-fiduciary duties that corporations owe to individual shareholders, such as the duty to recognize ownership, the duties of impartiality and fair dealing, and the duties to account and disclose. All of these rights and duties belong to the shareholder individually and cannot be safeguarded by "protecting the well-being of the corporation." Before and apart from the former shareholder oppression doctrine, Texas law has long recognized that individual shareholder suits may be brought to vindicate individual shareholder rights.

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Resources For Small Business Owners
Serving The Woodlands

A corporate stockholder may, however, have an action for personal damages for wrongs done to him as an individual stockholder “where the wrongdoer violates a duty arising from contract or otherwise, and owing directly by him to the stockholder.” This principle, often mischaracterized an exception to the general rule that stockholders may not sue for personal injury resulting from a violation of the corporation’s rights, simply recognizes that a stockholder may sue for violation of his own individual rights regardless of whether the corporation also has a cause of action. It is not personal injury which gives rise to a personal cause of action by the stockholder, for an injurious wrong to the corporation perforce injures its stockholders. Rather, it is the nature of the wrong, whether directed against the corporation only or against the stockholder personally, which determines who may sue.

In this section of the website, we look back to the development of the "exception" allowing for an individual shareholder suit dealing with oppressive conduct. We analyze landmark Texas Supreme Court cases such as Cates v. SparkmanStinnett v. ParamountYeaman v. Galveston City Co.Patton v. Nicholas (which we argue the Ritchie Court seriously misconstrued), and the classic example of an individual shareholder action upheld in the court of appeals opinion in Morrison v. St. Anthony Hotel. We then turn to an analysis of various causes of action that are asserted by individual shareholder suit, including breach of trust, stock conversion, dividend actions, ultra vires, dilution, and breach of fiduciary duties arising from confidential relationships. The individual shareholder suit is not dead after Ritchie. All of these causes of action are well-established in Texas law, and will be developed in the courts to fill the gaps in the law left by the Ritchie opinion.