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Shareholder Actions: Direct or Derivative?

Any business relationship involving shared financial interests will inevitably see change, as well as the potential for disputes. In some situations, those disputes may require shareholders in a corporation to file suit to prevent and remedy a wrong – either on behalf of the corporation itself or to protect their own ownership interests from indirect losses.

Because shareholders play a role in governing corporations that are legal entities separate and apart from any individual, they have unique rights when it comes to affecting change and protecting the interests of the business and themselves. This includes taking recourse through direct and derivative shareholder actions.

Direct Claims

Shareholders have a right to assert legal action in order to enforce the legal duties owed to them by corporate directors and officer through direct claims. These actions can address personal losses that result from a corporation’s breach of duty, and especially so in small and closely held corporations where minority shareholders have been victimized by majority shareholder oppression.

Although Texas has infamously struck down the cause of action allowing individual shareholders to assert direct claims for shareholder oppression in the landmark Texas Supreme Court case Ritchie v. Rupe, there are many causes of action for direct claims that fight oppression and other forms of misconduct, protect the success of a business, and provide redress when they suffer losses. These may include:

  • Breach of duty
  • Breach of contract
  • Fraud or conspiracy
  • Quantum merit
  • Theft of trade secrets
  • Force an accounting
  • Shareholder agreement violations
  • Conversion of property
  • Dividend actions
  • Unjust enrichment
  • Ultra vires
  • Breach of trust

Derivative Lawsuits

Another option for shareholder actions is a derivative suit. Shareholder derivative suits are claims brought on behalf of the corporation by shareholders who act as representatives, typically because members of the corporation (such as management, executives, officers, or majority shareholders) are unwilling or unable to bring claims against themselves. In addition to ensuring accountability within a corporation (for current or former officers), they may also be brought against third parties such as lawyers or accountants if their conduct contributed to individual losses.

A derivative suit can be a powerful tool in fighting corporate misconduct, including:

  • Fraud and unlawful conduct
  • Breach of fiduciary duty
  • Unjust enrichment
  • Self-dealing
  • Insider trading
  • Corporate waste

In Texas’ post-Ritchie world, derivative suits have also become a foundational tool in litigating shareholder disputes, particularly over oppression. That’s because while Texas law enforces requirements when most corporate owners bring derivative lawsuits, many of the procedural safeguards are waived for closely held corporations.

As such, minority shareholders of corporations or LLCs that are not publicly traded and have less than 35 shareholders have a much clearer field to pursue derivative suits on behalf of a corporation, have those suits treated as direct claims “if justice requires,” and prevail in recovering personally for damages that would have otherwise been provided and taxed through the corporation.

Protect Your Rights as a Shareholder: Call Hendershot, Cannon & Hisey, P.C.

At Hendershot, Cannon & Hisey, P.C. our Houston business lawyers have cultivated a reputation for providing the comprehensive counsel corporations and shareholders across Texas need through all phases of the life of a business. From drafting shareholder agreements to protect their interests and limit exposure to disagreement to delivering the representation needed to effectively resolve or litigate disputes, oppression, and corporate misconduct and fraud, we leverage over a century of collective experience to help clients explore their options and tailor strategies to help them succeed.

If you wish to discuss your rights as a shareholder, or would like more information about pursuing a direct or derivative shareholder action, call (713) 909-7323 or contact us online to request an initial consultation.

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