Just when it looked like all was lost for minority shareholders of closely held Texas corporations after the Texas Supreme Court eliminated shareholder oppression as a cause of action, along came the Court's decision of Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015). In this fascinating decision, the Court found that shareholders of TX closely held corporations do not have to first make a formal written demand upon the board of directors as a prerequisite to filing a derivative lawsuit. (A closely held corporation is one with fewer than 35 shareholders).
A derivative lawsuit is a proceeding instituted by shareholders on behalf of the corporation when the board of directors fails to initiate the lawsuit. This typically arises when one or more interested directors or officers has allegedly breached fiduciary duties owed to the corporation. Naturally, in these situations, even those directors who have done nothing wrong may be reluctant to file a lawsuit on behalf of the corporation against one of their fellow board members or officers. Thus, if the directors fail to act, the law provides a mechanism for the shareholders to file a derivative action on behalf of the corporation.
Generally, before the shareholders of a corporation may file a derivative action, they must first make a formal written demand upon the board of directors to institute the lawsuit. Only after the directors refuse to do so or fail to timely respond to the demand may the shareholders institute the lawsuit. However, the Texas Supreme Court held that the shareholders of Texas closely held corporations do not have to meet this demand requirement. They may simply file the lawsuit. This saves time and money for the complaining shareholders.
One other interesting fact in this case was that the shareholders of the parent corporation were instituting the derivative action on behalf of the parent corporation's wholly owned subsidiary. The court held that they were equitable shareholders of the subsidiary and therefore had standing to also bring the action on behalf of it.
