A Texas corporation is owned by one or more shareholders. Startups often attract minority shareholders to secure essential funding during the early stages of the business. However, as the number of shareholders increases, so does the risk of shareholder disputes and potential lawsuits. If you find yourself involved in such a dispute, SLG’s Austin, TX business litigation attorneys can help protect your rights and guide you through the legal process.
What Are a Shareholder’s Rights?
Corporations organized under Texas law must respect certain shareholder rights created by statute. But a corporation may also adopt its own bylaws and shareholder agreements that can modify, expand, or even restrict those rights. Litigation can arise when one or more shareholders believes their rights have not been respected by the corporation’s officers, directors, or majority shareholders.
Some common examples of shareholder rights include:
- Right to Examine: A shareholder who owns at least 5 percent of the corporation’s stock or who has been a shareholder for at least 6 months has the right to examine and inspect the records and books of the business.
- Right to Vote: Shareholders have the right to vote on specific issues relevant to the business, such as the election of directors.
- Right to Meet: Corporations typically must hold annual meetings of their shareholders. If the board of directors fails to schedule such a meeting, a shareholder can request one.
- Right to Dividends: If the corporation’s board of directors decides to declare a dividend, it must be paid in proportion to each shareholder’s interest.
A shareholder lawsuit may be based on a violation of any or all of these statutory rights and alleged violations of a shareholder agreement.
Derivative Lawsuits
A shareholder lawsuit may also allege that one or more officers and directors have engaged in wrongful acts that have financially harmed the corporation as a whole. These lawsuits are known as derivative actions, because they are technically brought on behalf of the corporation against one or more of its officers or directors. In such lawsuits, one or more shareholders serve as representative plaintiffs for all of the corporation’s shareholders. This is important because the officers and directors owe a fiduciary duty to the corporation itself and not the individual shareholders.
Under Texas law, a shareholder who intends to file a derivative lawsuit must first make a written demand on the corporation. This demand letter must state the basis of the shareholder’s claim of a wrongful act and request the corporation take action. The shareholder must then wait until the 91st day after presenting their demand to file a lawsuit. But if the corporation then informs the court they are investigating the shareholder’s demand, further proceedings on the lawsuit are stayed (suspended) for 60 days.
If management decides that it would not be in the corporation’s best interest to pursue the shareholder’s demand, it may compel the court to dismiss the lawsuit if that decision was made by a majority of the corporation’s independent and disinterested directors, a committee composed of such directors, or a panel of disinterested persons appointed by the court.
Contact SLG Today
Shareholder lawsuits can be highly complex for both shareholders and corporations. If you are involved in a shareholder dispute that could escalate, it’s important to consult a qualified Texas business litigation attorney promptly. Contact SLG today at (512) 881-7500 or reach out online to schedule a consultation.