McBride Law Blog

Can a Shareholder Bring a Lawsuit on Behalf of a Wholly Owned Subsidiary over Board Objections? (Part 2)

McBride Law Blog

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Business Judgment Rule.

The court first addressed whether the business judgment rule, which, among other things, protects the board of directors’ decision to pursue or forgo corporate causes of action, applies to closely held corporations so as to bar Webre’s derivative lawsuit.  In Texas, the statute that governed shareholder derivative suits during the relevant time in this case requires a shareholder to first file a written demand with the corporation and wait ninety days before commending a derivative proceeding.[1]  Moreover, under the statute, if the board determines in good faith that such suit is not in the best interests of the corporation and asks the court to dismiss the suit, the court must do so.[2]  The statute also provides, however, that the requirements for a written demand and mandatory dismissal do not apply to shareholder derivative lawsuits brought on behalf of closely held corporations.[3]

In other words, shareholders of a closely held corporation in Texas are not required to establish derivative rights to bring an action by showing that the directors failed to exercise their honest business judgment in not pursuing the corporate cause of action.[4]  The court noted that this is consistent with the court’s recent opinion in Ritchie v. Rupe, in which the court recognized that “the Legislature has enacted special rules to allow [shareholders of closely held corporations] to more easily bring a derivative suit on behalf of the corporation.”[5]  Accordingly, the court held that courts in Texas have jurisdiction to decide shareholder derivative litigation brought on behalf of closely held corporations, and it is immaterial whether the board of directors approves or disapproves such action.[6]

This post was a part of a multi-post blog series on Texas double-derivative shareholder suit in the context of a closely held corporation.  You can find the other posts by searching our blogs.  Our next post will focus on whether Webre, a shareholder of the parent corporation, could bring a derivate suit on behalf of the wholly owned subsidiary.

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; shawn.mcbride@rsmlawpllc.com, or www.mcbrideattorneys.com.

[1] Tex. Bus. Corp. Act § 5.14(C).

[2] Id. § 5.14(F).

[3] Id. § 5.14(L)(1).

[4] Sneed v. Webre, supra n.1, at 19.

[5] Id. at 26 (internal citations omitted) (emphasis in original).

[6] Id. at 30.

Posted In: Minority Shareholders, Texas Law Update, Uncategorized

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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