The law views corporations as “people,” meaning they are separate and apart from individuals associated with it, such as employees, managers, and shareholders, and that they have at least some rights and responsibilities afforded to real people. Corporate personhood is an important legal concept when it comes to conduct that causes shareholders to suffer losses, as it can mean the corporation itself is the entity that directly suffers a loss, rather than any individual shareholder.
Because shareholders often suffer a proportionate share of business losses indirectly, they generally do not have a right of action to seek remedy for damages to the corporation. A cause of action against a party that has harmed a corporation belongs to the corporation itself, even if that harm also caused a shareholder to suffer losses. This is based on the idea that if a corporation were to be made whole in a successful claim against the party that caused harm, shareholders would each recover their share of losses.
Although shareholders cannot recover damages to a corporation through individual claims, there may be other options for bringing individual shareholder suits based on the individual facts and circumstances involved – including how that shareholder was personally affected.
Loss of Shareholder Cause of Action
Texas’ former shareholder oppression doctrine was an exception which allowed individual shareholders to assert direct claims for legal remedy and a recovery of damages caused by shareholder oppression. However, the shareholder oppression cause of action was struck down by the landmark Texas Supreme Court decision Ritchie v. Rupe, as it was ruled most forms of oppression and misconduct were acts that harmed the corporation, and which could be remedied through actions brought by the corporation itself – or on its behalf through shareholder derivative suits.
In the wake of Ritchie v. Rupe, shareholders have had to explore new ways and exceptions for pursuing legal action over personal losses, particularly when damages result from a party violating duties owed directly to an individual shareholder. These exceptions are characterized by the nature of alleged misconduct and wrongdoing, rather than simply showing a stockholder has suffered harm (which often results from harm to the corporation). Although Ritchie v. Rupe did not eliminate individual shareholder claims, shareholders have had to establish new causes of action to fill in the gaps.
Individual Causes of Action in Shareholder Suits
Aside from shareholder derivative suits brought on behalf of a corporation, shareholders may assert various causes of action as individual claims, both to address personal losses, and to fight shareholder oppression. These include, among others:
Individual shareholders have legal rights and interests distinct from those of the corporation or its collective group of shareholders – including the right to information, voice, transferability of ownership, and a proportional share of profits – and they can be protected. Additionally, corporations owe duties to its shareholders, including its duty to recognize and not impair shareholder ownership rights, deal fairly and act impartially, and account and disclose. As such, there are legitimate avenues for individual shareholders to pursue legal remedy when those rights or duties are violated by a corporation. For example:
- An individual cause of action for breach of trust may arise from a corporation that violates the rights of shareholders or duties owed to shareholders.
- Because stock is considered personal property, individual shareholders may protect their property rights through the conversion cause of action.
- Individual stockholders have a legal right to corporate dividends and to a proportionate share of company profits, and may seek redress for suppression or manipulation of dividends (common in “squeeze outs” or “freeze-outs”) through individual claims, or causes of action such as breach of trust or stock conversion.
- Shareholders do not have a formal fiduciary relationship with fellow shareholders or a corporation’s officers or directors, but might be owed an informal fiduciary duty by fellow shareholders, if they arise from a pre-existing relationship of trust. This is a common scenario in closely-held corporations, and may give rise to individual shareholder claims for breach of fiduciary duty.
Discuss Your Rights & Options with Proven Houston Business Lawyers
Individual shareholders have options for pursuing legal remedies when facing oppression or a violation of their rights, but these options must be meticulously explored, creatively applied, and zealously litigated in order to be successful in the post- Ritchie v. Rupe legal landscape. Additionally, shareholders who want to protect their interests and limit exposure to such disputes should pro-actively work to construct and draft shareholder agreements.
At Hendershot Cowart P.C., our industry leading business law attorneys represent clients throughout the state of Texas when they wish to assert their rights as shareholders or defend against legal action. We also consult and work with clients who wish to create shareholder agreements and other governing documents or contracts to protect themselves against partnership and shareholder disputes. If you wish to speak personally with an attorney about your potential case and the services we provide, contact us to request an initial consultation.