Sneed v. Webre
No. 12-0045
Case Summary written by David Miles, Staff Member.
JUSTICE GREEN delivered the opinion of the Court.
In this case, Webre, a shareholder of a closely held parent corporation, “asserted a derivative lawsuit on behalf of the parent corporation’s wholly owned subsidiary against one of the subsidiary’s directors and several of the subsidiary’s officers, managers, and employees for fraud and breach of fiduciary duties.” The trial court held that Webre did not have standing to bring the derivative suit and granted the defendants’ motion to dismiss. “The court of appeals reversed and held that the shareholder had double-derivative standing to sue, and that the business judgment rule did not impose a jurisdictional barrier that the shareholder had to overcome to bring a derivative lawsuit on behalf of a closely held corporation.” The Supreme Court of Texas affirmed.
Webre and three of his siblings each owned “roughly 24% of the Class A voting stock in Texas United.” Webre’s brother-in-law and uncle owned the remaining shares. Texas United owned 100% of United Salt. The Webre siblings were on the board of directors for both companies.
“The dispute in this case arose from a United Salt business deal to acquire a salt mining and storage facility in Saltville, Virginia (the Saltville Acquisition).” The purpose of the acquisition was to recover salt for sale, and they planned to “expand the Saltville facilities to drill additional wells to extract salt from the brine and to eventually use the underground caverns created by the bring process for gas storage.” The projected profits from this acquisition were $46 million over the first ten years. Webre was skeptical about the profitablility and “dissented every time the United Salt board took a vote regarding the deal.” In his suit against the officers and managerial employees of United Salt, Webre alleged that the officers mislead the board by failing to “disclose the possibility of future gas storage operations.” He alleged that United Salt lost in excess of $7 million as a result.
The Court considered three issues: (1) the role of the business judgment rule in a derivative lawsuit brought by a shareholder on behalf of a closely held corporation; (2) “whether a shareholder plaintiff must establish derivative standing by pleading and proving jurisdictional facts to overcome the board of directors’ business judgment not to pursue the closely held corporation’s cause of action”; and (3) whether a plaintiff may bring a suit based on double-derivative standing, “which enables a shareholder of a parent corporation to bring a derivative lawsuit on behalf of a wholly owned subsidiary.”
The Court interpreted article 5.14 of the TBCA in determining each issue. In resolving the first issue, the Court held that “[t]he business judgment rule continues to apply to the merits of a derivative proceeding, whether brought on behalf of a closely held corporation or any other corporation, when a corporation’s officers’ or directors’ actions are being challenged.” The Court held that only 5.14(A) and 5.14(L) apply to closely held corporations, removing many obstacles that apply in a regular corporate setting.
In regards to the second issue, the Court held that “sections (A) and (L) of article 5.14 establish that a shareholder of a closely held corporation may bring a derivative proceeding in the right of the corporation.” The Court noted “that article 5.14’s standing, demand, and mandatory dismissal requirements do not apply to shareholder derivative lawsuits brought on behalf of closely held corporations.”
The Court ultimately held that the Texas legislature does recognize a double-derivative cause of action. The Court reasoned that “[a]s a shareholder of Texas United, Webre has an equitable or beneficial ownership interest in Texas United’s assets. Texas United owns all of United Salt and the right to assert a shareholder derivative proceeding on behalf of United Salt. We have already concluded that Webre has standing to assert a derivative proceeding on behalf of Texas United, and therefore, he has standing to assert a derivative proceeding on behalf of United Salt.”