fiduciary duty of loyalty
Shareholders rights and fiduciary duty of loyalty
Minority shareholders rights and remedies: protecting minority shareholders in Texas after Ritchie: Shareholders rights and fiduciary duty of loyalty.
Texas
Rediscovering Shareholders Rights in Texas
The demise of the Shareholder Oppression Doctrine in the Texas Supreme Court's Ritchie v. Rupe decision lead many to fear that minority shareholders were no longer protected by the law. Not so. The Supreme Court rejected the shareholder oppression doctrine as the mechanism of vindicating minority shareholder rights, but the decision left the underlying rights of minority shareholders in tact. What, under the shareholder oppression doctrine, had been termed "general reasonable expectations of shareholders," are really fundamental rights of shareholders arising from property law and the laws governing corporations. In light of the Ritchie holding, it is time to rediscover minority shareholder's fundamental property rights under Texas law.
Personal Property
Stock Ownership as Personal Property
In Texas, property rights are “sacred and fundamental” “a foundational liberty, not a contingent privilege,” “natural, inherent, inalienable, not derived from the legislature and preexisting even constitutions.” The Texas Supreme Court has held:
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.
The Texas Supreme Court has stated that “freedom itself [] demand[s] strong protections for individual property rights.” Protection of those rights is “one of the most important purposes of government.”
Stock is personal property, and the stockholder is a property owner. Texas law has long recognized “the property right which a share in such a company creates.”
Shares of stock in a corporation are a species of personal property, belonging to the holder thereof, entirely separate and distinct from the property of the corporation itself. They are the subject of barter and sale the same as other personal property. Under our laws they are subject to taxation, may be impounded by garnishment proceedings, and may be sold under execution as other personal property. They are the intangible interests of the individual shareholders in the corporate business, while the tangible property belongs to the corporation.
What Does It Mean to Own "Stock"?
What does it mean to own a personal property interest in “stock”? First, it is important to note that “owning stock” does not mean possessing a stock certificate. Texas law has long held that the certificate is not the “stock.” The certificate is merely evidence of the ownership of the stock. A stockholder owns the stock whether or not he possesses the certificate and regardless of whether a certificate was ever even issued.
Rather, “stock” constitutes an undivided partial ownership interest in the corporation, which the courts analogize to a trust fund made up of the assets, opportunities, and business operations of the corporate enterprise. Each share of stock is an undivided, proportional ownership interest in the trust fund. However, ownership of the corpus of the trust fund itself and ownership of the partial interest in that fund are completely different things. The corporation owns everything in the trust fund but does so as trustee for the benefit of the shareholders. Minority shareholders have rights because their stock ownership necessarily grants the property rights, which impose duties on the corporation.
Property Rights
Shareholders' Bundle of Property Rights
In Moroney v. Moroney, 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.
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. However, all property ownership ultimately constitutes an intangible “bundle of rights.” The concept of property does not refer to a thing but rather to the rights and legal relationship between a person and a thing. The common law and statutes define these rights. 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.
"Bundle of Rights"
The Minority Shareholder's "Bundle of Rights"
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." For purposes of protecting minority shareholders from oppressive and predatory conduct in closely-held corporations, we will focus of five basic components of the “bundle” or “array” of rights and interests that constitute stock ownership and are subject to legal protections:
- to information regarding the corporation,
- rights to a voice in corporate affairs,
- to the transferability of stock, and
- to a proportional share in corporate profits,
- and the quasi-fiduciary duty that corporations owe to shareholders, which encompasses
- the basic duty of good faith,
- the duty to recognition of share ownership,
- the duty to account, and
- the duty of imartiality.
