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Can a Shareholder Bring a Lawsuit on Behalf of a Wholly Owned Subsidiary over Board Objections?

McBride Law Blog

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Sneed v. Webre.

In our previous blog post on Ritchie v. Rupe (available here), we discussed the rights of Texas minority shareholders in a closely held corporation in the context of shareholder oppression.  Closely held corporations and many small companies whose shares are not publicly traded present unique legal issues, especially with respect to shareholder rights, because of their distinct characteristics.

In Sneed v. Webre,[1] the Supreme Court of Texas addressed whether a shareholder of a closely held corporation can bring a double-derivative lawsuit on behalf of the parent corporation’s wholly owned subsidiary over board objections.  As some of you may already know, a shareholder derivative suit is an action brought by a shareholder on behalf of the company when management has failed to do so.  In 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.  The closely held corporation in this case was a family business with multiple subsidiaries and affiliates that engaged in brine production and salt manufacturing.  Webre was a 24% owner and director of the parent corporation, Texas United Corporation or TUC, and a director of a wholly owned subsidiary, United Salt Corporation or USC.[2]  In 2006, USC’s board took a series of actions to acquire a salt mining and storage facility in Virginia.[3]  Webre was not convinced about the profitability of the acquisition and dissented every time the USC board took a vote regarding the deal.[4]  Ultimately, Webre sued a director and several of the officers of USC and other affiliated entities in his individual capacity and derivatively on behalf of USC and TUC, based on his status as a shareholder in TUC,[5] making this a so-called “double-derivative claim.”  Specifically, Webre alleged that the defendants’ failure to provide complete information regarding the acquisition caused USC to enter into an unprofitable transaction that caused both USC and TUC significant financial loss.[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.  Our next post will focus on whether the business judgment rule (which, among other things, protects the board of directors’ decision to pursue or forgo corporate causes of action) in Texas would prevent Webre from bringing a derivative action over board’s objections.

 

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] See generally Sneed v. Webre, No. 12-0045 (Tex. Sup. Ct. May 29, 2015).

[2] Id. at 3, 5.

[3] Id. at 4–5.

[4] Id. at 5.

[5] Id. at 6.

[6] Id.

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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