The law views corporations as “people,” meaning they are separate and apart from individuals associated with them, such as employees, managers, and shareholders, and 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.
Shareholder Oppression As a "Cause of Action" Struck Down By the Texas Supreme Court In 2014
Texas’s former shareholder oppression doctrine was an exception that 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 in 2014 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.
Individual Shareholders Explore Other Legal Options
In the wake of Ritchie v. Rupe, shareholders have had to establish new causes of action to fill in the gaps, particularly when damages result from a party violating duties owed directly to an individual shareholder.
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 claims are often based on the nature of alleged misconduct and wrongdoing, rather than simply showing a stockholder suffered harm (which often results from harm to the corporation).
Causes of action available to individual shareholders include, among others:
- Breach of fiduciary duty
- Violations of shareholder agreements
- Breach of contract
- Fraud or fraudulent transfers
- An accounting
- Quantum merit
- Theft of trade secrets
- Breach of trust
- Conversion of property
- Ultra vires
- Dividend actions
- Unjust enrichment
- Conspiracy
Examples of Legal Claims Available to Individual Shareholders
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 their shareholders, including a 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 remedies when those rights or duties are violated by a corporation.
Consider these examples of legal actions available to individual shareholders:
- 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.
- While shareholders don't have formal fiduciary duties to each other or to corporate officers and directors, an informal fiduciary duty might exist between shareholders when there's a pre-existing relationship based on 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 Shareholder 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 proactively work to construct and draft shareholder agreements.
At Hendershot Cowart P.C., our industry-leading business law attorneys represent clients throughout Texas when they wish to assert their rights as shareholders or defend against legal action. We also consult and work with clients to create shareholder agreements and other governing documents or contracts that protect 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.