Texas: An Issue for the Jury.
In Texas, a holder of shares of a corporation for at least six (6) months, or a holder of at least 5% of all of the outstanding shares of a corporation, is entitled to examine and copy the corporation’s relevant books, records of account, minutes, and share transfer records at a reasonable time, in person or through an agent, subject to the governing documents and on written demand stating a proper purpose.[1] If the corporation raises a fact issue on the shareholder’s proper purpose, the issue will go to a jury trial.
The Supreme Court of Texas has addressed the issue of proper purpose, albeit a long time ago. In Uvalde Rock Asphalt Co. v. Loughridge,[2] shareholders sought to inspect the company’s books and records for the stated purposes of “a determination of the causes and reasons for the precipitous decline in profits of the corporation; . . . ; to determine whether excessive compensation is being paid to officers, directors or others close to management; to determine the extent to which stockholders have participated in stockholders’ meetings and action taken at such stockholders’ meetings, and generally to inquire into the details of the corporation’s operations and practices for the purpose of protecting their investment.”[3] The company resisted, citing a disagreeable relationship between the company and the shareholders and alleging that the shareholders had improper purposes, i.e., obtaining a competitive advantage in the area in which the parties were competitors and forcing the company to purchase their shares at a grossly inflated price, among other things.[4] Without passing upon the merits of the issues, the Supreme Court held that the company’s pleadings raised a fact issue over whether the shareholders had a proper purpose, which would, ultimately, lead to a jury trial.[5]
In In re Dyer Custom Installation, Inc.,[6] a 50% shareholder made a request to inspect “all books and records” on the day he resigned as president and director of the company after disagreements over the business’s operations with the other 50% shareholder.[7] The company denied the request, arguing that the shareholder sought the information to (i) gain a competitive advantage; (ii) harass officers and directors to gain “shareholder capital” or dissolve the business; (iii) force the company to purchase his stock at an inflated price; (iv) gain the upper hand in litigation; and (v) continue to interfere with the company’s business relations and contracts in an attempt to dissolve the company, and generally alleging that the shareholder acted in bad faith.[8] The company also alleged that the shareholder, in an attempt to dissolve the company, had sold or offered for sale a list of shareholders and introduced evidence of the shareholder’s conduct detrimental to the company.[9] The court held that the testimony, along with the company’s allegations, was sufficient to raise a fact issue as to the shareholder’s proper purpose and concluded that the trial judge abused his discretion in not ordering a jury trial on the issue.[10]
This post was a part of a multi-post blog series on shareholder inspection rights and the limits thereof. You can find the other post by searching our blogs at www.mcbrideattorneys.com. If you have any questions about the content of this blog series 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: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] Tex. Bus. Org. Code § 21.218(b) (emphasis added).
[2] Uvalde Rock Asphalt Co. v. Loughridge, 425 S.W.2d 818 (Tex. 1968).
[3] Id. at 819.
[4] Id. at 819–20.
[5] Id. at 820–21.
[6] In re Dyer Custom Installation, Inc., No. 05-04-00416-CV (Tex. App.–Dallas 2004).
[7] Id.
[8] Id.
[9] Id.
[10] Id.