McBride Law Blog

Can a Shareholder Bring a Lawsuit on Behalf of a Wholly Owned Subsidiary over Board Objections? (Part 3)

McBride Law Blog

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Double-Derivative Action.

The court next addressed whether Webre, a shareholder of the parent corporation, could bring a derivative suit on behalf of the wholly owned subsidiary.  The court noted that “[i]n a ‘double derivative’ action, the shareholder is effectively maintaining the derivative action on behalf of the subsidiary, based upon the fact that the parent or holding company has derivative rights to the cause of action by the subsidiary.”[1]  Webre argued that his status as a shareholder of USC’s only shareholder provided him with a beneficial or equitable ownership interest in USC.[2]

Indeed, under the applicable statute, ““shareholder” includes a beneficial owner whose shares are held in a voting trust or by a nominee on the beneficial owner’s behalf.”[3]  Thus, the court reasoned, in the closely held corporation context, the definition of a shareholder does not exclude those with a beneficial or equitable interest in a subsidiary and the derivative plaintiff is not required to be a shareholder of the corporation he is bringing suit on behalf of.[4]  In doing so, the court recognized that, were it to hold otherwise, the directors of a closely held corporation could simply create a wholly owned subsidiary to circumvent the legislature’s intent to make it easier for shareholders to assert derivative proceedings on behalf of closely held corporations.[5]  Accordingly, the court held that Texas law recognizes the availability of double-derivative action for shareholders of a closely held parent corporation to assert claims on behalf of a wholly owned subsidiary, as Webre did here.[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.  If you have any questions about the content of this blog or other issues not discussed here, please contact us.

 

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] Id. at 30–31.

[2] Id. at 31.

[3] Tex. Bus. Corp. Act § 5.14(A)(2) (emphasis in original).

[4] Sneed v. Webre, supra n.1, at 35.

[5] Id. at 35–36.

[6] Id. at 37.

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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