Justice Green delivered the opinion of the Court.
The business judgment rule in Texas generally protects corporate officers and directors, who owe fiduciary duties to the corporation, from liability for acts that are within the honest exercise of their business judgment and discretion. See Cates v. Sparkman, 73 Tex. 619, 11 S.W. 846, 848-49 (1889). This case involves application of the business judgment rule to a shareholder derivative lawsuit brought on behalf of a closely held corporation. 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 concluded that the shareholder did not have standing to bring the derivative lawsuit and granted the defendants' pleas to the jurisdiction and motions 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. 358 S.W.3d 322, 326 (Tex.App.-Houston [1st Dist.] 2011). The petitioners raise three issues: (1) what role does the business judgment rule play when a shareholder brings a derivative lawsuit 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 Texas recognizes the concept of double-derivative standing, which enables a shareholder of a parent corporation to bring a derivative lawsuit on behalf of a wholly owned subsidiary. We affirm the court of appeals' judgment.
This case demonstrates the close ties within closely held corporations. In 1926, C.J. Webre started a family business mining salt from underground salt caverns in Hockley, Texas. The family business grew and became profitable. Over time, the family business evolved into multiple corporations and companies, wholly owned subsidiaries, and affiliates that engaged in brine production and salt manufacturing. Texas Brine Company, LLC and other related entities drilled wells into salt caverns to produce and recover brine. The brine producing line of companies also used the underground caverns by injecting gas or liquid hydrocarbons for storage. Texas United Corporation and its wholly owned subsidiary, United Salt Corporation, engaged in the business of manufacturing
Ownership of the entities comprising the family business has remained within the Webre family. During the relevant time in this case, four siblings — Lloyd P. Webre, Jr., Camille Webre Tichenor, Mary Iris Webre, and Roberta Webre Rude (collectively the Webre siblings) — each owned roughly 24% of the Class A voting stock in Texas United.
Robert Sneed served as the president and CEO of Texas United. Sneed also served as the secretary and treasurer of Texas Brine. In addition to being a shareholder and board member, James Tichenor served as Texas United's senior vice president. Tichenor also served as the vice president of Texas Brine. Fred Wolgel served as Texas United's vice president and general counsel. Wolgel also served as the vice president and general counsel of Texas Brine.
The four Webre siblings also served on the board of directors of Texas United's wholly owned subsidiary, United Salt, along with Iris P. Webre (their mother), Arnold Webre (their uncle), their brother-in-law James Tichenor (Camille Webre Tichenor's husband), and Robert Duboise. James O'Donnell served as the president and CEO of United Salt.
Although each of the entities comprising the family business was closely held, the Webre family operated them as if they were larger, publicly traded entities. The entities were managed in full observation of all corporate formalities, there were regular shareholder and board of director meetings, and the entities kept written records of the actions and resolutions taken at those meetings. The family business also employed other staff, employees, and officers to help run the various entities.
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). Beginning in 2006, United Salt's president, James O'Donnell, presented the Saltville Acquisition as a new business opportunity to the board of directors. The acquired land and facilities would be used to recover salt for sale, and a plan was formed 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 brining process for gas storage. Due to concerns over the potential liabilities of operating a gas storage facility, Texas Brine was to create a new subsidiary to acquire the gas storage operations immediately after the Saltville
Over the course of several years, corporate records reflect that the United Salt board of directors took numerous votes and actions with respect to conducting, affirming, and ratifying the Saltville Acquisition. Every vote was passed by a majority of the United Salt board of directors. Eventually, the United Salt board became aware that the cost of the Saltville Acquisition was exceeding initial projections, and the board commissioned investigations into the cost overruns to inquire about any possible wrongdoing. The investigations included the hiring of an independent accounting firm to conduct an audit of the Saltville Acquisition, but the accounting firm did not find any fraud or self-dealing in the payment of expenditures or costs. Financial projections for the Saltville Acquisition, which included projected cost overruns, forecasted that the deal would generate a net profit of $46 million over the first ten years. Each of the four Webre siblings, as shareholders of United Salt's parent corporation, Texas United, were projected to receive approximately $10 million in profit from the deal over the same ten-year period.
One United Salt director, Lloyd P. Webre, Jr. (Webre), who was also a Texas United director and shareholder, was not convinced about the profitability of the Saltville Acquisition. He dissented every time the United Salt board took a vote regarding the deal. He even visited the Saltville facility to question its management about his concerns. Time and again, he voiced his concerns at the United Salt director meetings to his family and the other directors, and time and again, a majority of the board of directors voted to proceed with the Saltville Acquisition.
After the Saltville Acquisition was completed, Webre sued a director and several of the officers and managerial employees of United Salt and other affiliated entities in his individual capacity and derivatively on behalf of United Salt and Texas United. Webre's lawsuit was based on his status as a shareholder in Texas United. Specifically, Webre sued Robert Sneed, James Tichenor, Fred Wolgel, and James O'Donnell (collectively, the individual defendants) as the officers and managers of United Salt and the other entities affiliated with Texas United.
Webre amended his petition to allege that the individual defendants "purposely and fraudulently failed to fully inform the directors of United Salt about the full scope of the [Saltville Acquisition], potential liabilities, additional costs, and plans for the future of the Saltville Acquisition and that such actions were fraudulent and a breach of their fiduciary duties." Webre also alleged that the individual defendants breached their fiduciary duties by recklessly entering into contracts on behalf of United Salt that the corporation could not perform, and that they engaged in fraudulent concealment of key information relating to the Saltville Acquisition. Recognizing the large overlap between the management of the entities involved in the Saltville Acquisition, Webre alleged that the respective boards of directors relied heavily on the individual defendants for advice, guidance, and information in making corporate decisions. This heavy reliance enabled the individual defendants to manipulate the respective boards by providing false or incomplete information. Webre alleged that he visited the Saltville site personally, discovered numerous problems associated with the proposed acquisition, and wrote a letter to the individual defendants in April 2007 detailing his concerns. He alleged that the individual defendants failed to fully investigate all of the concerns presented in the letter, and in a special United Salt board meeting later that month, the individual defendants failed to provide the board with complete information to allow the board members to make an informed decision about whether to proceed with the Saltville Acquisition. As a result, a majority of the United Salt board members voted to reaffirm the Saltville Acquisition, and later, according to Webre, the numerous problems he predicted materialized and caused United Salt and Texas United significant financial loss. Webre also accused the individual defendants of knowingly or recklessly supplying false information to the United Salt and Texas United boards of directors to boost the corporations' financial forecasts so the individual defendants would receive higher performance bonuses.
Texas United and United Salt (collectively, the corporations) intervened as indispensable defendants. The corporations and the other individual defendants (collectively, the defendants) filed special exceptions, pleas to the jurisdiction, pleas in abatement, motions for summary judgment, and motions to dismiss that contended, among other things, that Webre lacked standing to assert a shareholder derivative lawsuit.
The trial court found that Webre lacked standing to sue, but it did not elaborate on whether Webre's lack of standing was based on the double-derivative nature of the lawsuit or because his pleadings failed to overcome the business judgment rule. The trial court granted the pleas to the jurisdiction and motions to dismiss the lawsuit, and it did not rule on the motions for summary judgment, pleas in abatement, or special exceptions.
The court of appeals reversed. 358 S.W.3d at 326. Regarding the business judgment rule, the court of appeals held that the trial court should not have dismissed Webre's lawsuit for lack of standing due to his failure to plead and prove that the directors' decision not to pursue the corporation's causes of action was due to fraud or self-dealing. Id. at 335-36. The court of appeals also held that because Webre brought a shareholder derivative lawsuit on behalf of a closely held corporation,
This case involves closely held corporations, which are defined as having fewer than thirty-five shareholders and "no shares listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national securities association."
Ritchie, 443 S.W.3d at 878-79 (footnotes omitted). With these characteristics in mind, we consider the role of the business judgment rule in shareholder derivative actions brought on behalf of closely held corporations. Then we turn to the issue of whether the business judgment rule impacts a shareholder's standing to assert a derivative action on behalf of a closely held corporation. Finally, we address double-derivative standing.
In Texas, the business judgment rule protects corporate officers and directors from being held liable to the corporation for alleged breach of duties based on actions that are negligent, unwise, inexpedient, or imprudent if the actions were "within the exercise of their discretion and judgment in the development or prosecution of the enterprise in which their interests are involved."
Thus, the business judgment rule traditionally is implicated twice within the life cycle of a shareholder derivative proceeding brought on behalf of a corporation. First, the business judgment rule applies to the board of directors' decision whether to pursue the corporation's cause of action. See Cates, 11 S.W. at 849; Langston, 719 S.W.2d at 616-17; see also Pace v. Jordan, 999 S.W.2d 615, 623 (Tex.App.-Houston [1st Dist.] 1999, pet. denied) ("Under the business judgment rule, a shareholder cannot institute a derivative suit on the corporation's behalf by merely showing that the board's refusal to act was unwise, inexpedient, negligent, or imprudent."). Second, the business judgment rule applies as a defense to the merits of a shareholder's derivative lawsuit that asserts claims against the corporation's officers or directors
The defendants urge us to "reaffirm that the business judgment rule in Texas applies to derivative suits brought on behalf of all corporations, including closely held corporations." The defendants accuse the court of appeals of "removing the protections of the business judgment rule from closely held corporations, [which] conflicts with over 100 years of Texas law represented by Cates and its progeny, not to mention equally long-standing authority in other states." In response, Webre contends that "Sections B through H [of article 5.14] provide the statute's traditional `business judgment rule' provisions, requiring demand, majority vote by the directors, and so forth." Further, Webre argues that the Legislature intended to exempt closely held corporations from those "requirements and defenses" by enacting article 5.14(L). At oral argument, both parties conceded that the business judgment rule applies in derivative proceedings to the merits of the case.
We disagree with the defendants' characterization of the court of appeals' opinion and find no instance where it held that the business judgment rule is entirely inapplicable when derivative suits are brought on behalf of closely held corporations. Instead, the court of appeals held that "sections (B) through (H) of article 5.14 do not apply to derivative suits filed on behalf of closely held corporations." 358 S.W.3d at 336. The court of appeals distinguished Pace, which held that "to bring a derivative suit in the right of a corporation, a shareholder must show that the board of directors' refusal to act was governed by something beyond unsound business judgment." Id. (quoting Pace, 999 S.W.2d at 623). Because Pace involved sections of article 5.14 that do not apply to closely held corporations, the court of appeals concluded, "the reasoning in Pace, which relied on those provisions [that do not apply to closely held corporations], while applicable then and now to suits brought by a shareholder on behalf of a corporation that is not closely held, does not apply to the instant litigation." Id. at 336-37 (citing Pace, 999 S.W.2d at 623). The court of appeals never held that the business judgment rule has no applicability in derivative proceedings involving closely held corporations. The defendants' assertion to the contrary is misleading.
Our recent decision in Ritchie affirms that the business judgment rule applies to closely held corporations. See Ritchie, 443 S.W.3d at 869. The Legislature's codification of shareholder derivative proceeding procedures in article 5.14 did not alter how the business judgment rule, as announced in Cates, applies to the merits of claims against a corporation's officers or directors for breach of corporate duties. The 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 next question we must address is whether the business judgment rule protects a closely held corporation's board of directors' decision not to pursue a corporate cause of action and whether a shareholder plaintiff must plead and prove that such a decision was tainted by fraud, self-interest, or other wrongdoing to establish derivative standing.
"Standing is a constitutional prerequisite to maintaining suit in either
Standing is a component of subject matter jurisdiction that courts review de novo. Tex. Dep't of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 646 (Tex.2004). A plaintiff's lack of standing may be challenged through a plea to the jurisdiction, as well as other procedural devices. Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547, 554 (Tex.2000). "A plea to the jurisdiction challenges the court's authority to decide a case." Heckman v. Williamson Cnty., 369 S.W.3d 137, 149 (Tex.2012) (citing Bland Indep. Sch. Dist., 34 S.W.3d at 553-54).
Relying on Cates, the defendants contend that the business judgment rule "vests responsibility for decision-making in the corporation's board of directors and precludes shareholders from disrupting the board's decisions through derivative actions when the board has determined a particular action is or is not in the corporation's best interest." The defendants assert that the corporation owns the cause of action, and, under article 2.31 of the TBCA, the board of directors, and not shareholders or even the courts, has the power to manage the corporation's affairs. Included under article 2.31's grant of board-only management is the sole authority to decide whether to pursue the corporation's legal rights in litigation. The defendants cite Delaware case law for the proposition that "[t]he business judgment rule is a threshold issue of substance in every derivative suit without exception, because a shareholder suit is in essence a challenge to the board of directors and their managerial power over derivative litigation." According to the defendants, because the business judgment rule is substantive, it "creates a presumption that the directors acted lawfully in taking corporate actions, including refusing to bring derivative suits." Therefore, the defendants contend that for Webre to divest the United Salt board's control over the corporate cause of action and maintain a derivative suit, he must plead and prove that the board of directors acted in a manner that goes beyond unsound business judgment. To obtain standing under the defendants' theory, Webre would have to plead and prove that the board of directors' failure to pursue the corporate cause of action was "characterized by ultra vires, fraudulent, and injurious practices, abuse of power, and oppression on the part of the company or its controlling agency clearly subversive of the rights of the minority, or of a shareholder, and which, without such interference, would leave the latter remediless." Cates, 11 S.W. at 849 (citation omitted).
Our analysis begins with the statute that governed shareholder derivative suits in Texas during the relevant time in this case, article 5.14 of the TBCA. See
It is critical to recognize, and indeed outcome determinative in this case, 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. See TEX. BUS. CORP. ACT art. 5.14(L)(1) ("The provisions of Section B through H of this article are not applicable to a closely held corporation."). Thus, with respect to closely held corporations, all that remains is article 5.14(A)(1)'s recognition that a derivative proceeding "means a civil suit in the right of a domestic corporation," and article 5.14(L)'s recognition that a shareholder of a closely held corporation may bring a derivative proceeding, and, if justice requires, a court may treat the derivative action as a direct action brought by the shareholder for his own benefit and award recovery directly to the shareholder or derivatively to the corporation.
The parties agree that Cates is the seminal case on the business judgment rule in Texas. There, the Court posed a lengthy question of whether a shareholder plaintiff's allegations were sufficient to maintain a suit against officers and directors of a corporation for fraudulent practices and misapplication of corporate assets that allegedly caused the shareholder to suffer loss because the value of his stock depreciated and the corporation had actually or virtually refused to sue on its own behalf. Cates, 11 S.W. at 848. After recognizing that the rules supplied by the prevailing authorities at the time were "not altogether reconcilable in this class of cases," the Court explained:
Id.
In Cates, the Court announced three requirements that were "regarded as indispensable as the basis for such a [shareholder derivative] suit: The company must refuse to sue; there must be a breach of duty; there must be injury to the stockholder." Id. at 849 (citation omitted). The Legislature later codified these requirements in article 5.14 of the TBCA. See Act of May 26, 1973, 63rd Leg., R.S., ch. 545, § 37, 1973 Tex. Gen. Laws 1486, 1508-09, amended by Act of May 13, 1997, 75th Leg., R.S., ch. 375, § 30, 1997 Tex. Gen. Laws 1517, 1540-43 (expired January 1, 2010). With respect to corporate law, we have previously recognized that when the Legislature codifies common law corporate principles, "[t]he effect of these statutes was to supplant the equitable [common law] theory by declaring a statutory equivalent." Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547, 550 (Tex. 1981). Because the Legislature is never presumed to do a useless act, we have held that the enactment of a common law equitable theory into the TBCA "bars resort to the [equitable] theory as it exists apart from the statute." Id. at 551. Thus, it is noteworthy that a shareholder's right to sue on behalf of a corporation was "historically an equitable matter." Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 24
Quite simply, by virtue of Article 5.14, the Legislature codified a shareholder's right to bring a derivative proceeding on behalf of a closely held corporation. Cf. Williams, 52 S.W.3d at 178-79 (recognizing that standing can be conferred by statute). In doing so, the Legislature did not require shareholders of a closely held corporation to establish derivative standing by pleading or proving that the directors failed to exercise their honest business judgment in not pursuing the corporate cause of action. In fact, as discussed, the Legislature removed barriers that could prevent a shareholder of a closely held corporation from asserting a derivative lawsuit. See TEX. BUS. CORP. ACT art. 5.14(L); cf. Ritchie, 443 S.W.3d at 864 n. 8 ("Closely held corporations have unique attributes that may justify different protections under the law."). Remarkably, the Legislature even removed the requirement that a shareholder in a closely held corporation meet the standing requirement of article 5.14(B) that "[a] shareholder may not commence or maintain a derivative proceeding unless the shareholder ... fairly and adequately represents the interests of the corporation in enforcing the right of the corporation." TEX. BUS. CORP. ACT art. 5.14(B). "When the Legislature includes a right or remedy in one part of a code but omits it in another, that may be precisely what the Legislature intended," and "we must honor that difference." PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P'ship, 146 S.W.3d 79, 84 (Tex.2004) (citations omitted). Moreover, "[a]s we consider existing statutory remedies, we are mindful of the principle that, when the Legislature has enacted a comprehensive statutory scheme, we will refrain from imposing additional claims or procedures that may upset the Legislature's careful balance of policies and interests." Ritchie, 443 S.W.3d at 880 (citing Liberty Mut. Ins. Co. v. Adcock, 412 S.W.3d 492, 493 (Tex. 2013)).
The Court's discussion in Cates about the necessity of a shareholder requesting that the corporation bring suit to enforce its rights was a precursor to what is now commonly known as the demand requirement, which was later codified in article 5.14(C). See TEX. BUS. CORP. ACT art. 5.14(C). This Court has previously discussed the statutory history of the demand requirement:
In re Schmitz, 285 S.W.3d at 454-55 (footnotes and citations omitted). It has been recognized that the demand requirement overlaps with the business judgment rule, at least with respect to the board of directors' decision to pursue the corporation's causes of action. See Kamen, 500 U.S. at 96, 111 S.Ct. 1711 ("The purpose of the demand requirement is to affor[d] the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right.") (quotations omitted).
But this statutory demand requirement does not apply to shareholder derivative proceedings brought on behalf of closely held corporations. See TEX. BUS. CORP. ACT art. 5.14(L). We must give meaning to the Legislature's removal of the demand requirement in derivative proceedings brought on behalf of closely held corporations. See Hunter, 620 S.W.2d at 551 ("[T]he [L]egislature is never presumed to do a useless act."). In other words, the demand requirement is excused in all instances in which a shareholder asserts a derivative proceeding on behalf of a closely held corporation. See TEX. BUS. CORP. ACT art. 5.14(L).
The United States Supreme Court has accurately recognized that "the contours of the demand requirement — when it is required, and when excused — determine who has the power to control corporate litigation." Kamen, 500 U.S. at 101, 111 S.Ct. 1711. "[T]he demand requirement implements `the basic principle of corporate governance that the decisions of a corporation — including the decision to initiate litigation — should be made by the board of directors or the majority of shareholders.'" Id. (quoting Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 530, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984)). But when the demand requirement is excused, such as when it is no longer required by statute, the board of directors' "business judgment bec[omes] irrelevant to the plaintiffs' standing, for it never [is] consulted." Clark v. Lomas & Nettleton Fin. Corp., 625 F.2d 49, 53-54 (5th Cir.1980);
Under the same reasoning, we hold that by removing the mandatory dismissal requirement with respect to closely held corporations, the Legislature removed the ability for disinterested and independent directors or a special investigation committee to decide whether continuing the derivative proceeding is in the best interest of the corporation. See TEX. BUS. CORP. ACT art. 5.14(F), (L). Because the Legislature excepted closely held corporations from this mandatory dismissal requirement, we decline the defendants' request to reinstate it in an alternative form.
In a similar vein, we address the defendants' contention that to divest a closely held corporation's ownership of a cause of action, a shareholder plaintiff must plead and prove that the board of director members were not disinterested or acted fraudulently in declining to pursue the corporation's cause of action. This contention mimics the "demand futility" exception from Cates that was codified in the pre-1997 version of article 5.14 but was later eliminated. See In re Schmitz, 285 S.W.3d at 455. Under the pre-1997 version of the TBCA, "[t]he demand requirement was excused only when demand was deemed to be futile, which occurred when the board of directors lacked impartiality in making a business decision on whether to institute a suit on the corporation's behalf." Stanfield, supra note 8, at 359 (citing Wise, supra note 8, at 71-72) ("Demand will be excused when the role of the directors in the challenged conduct, or the alleged domination or control of the directors by the alleged wrongdoers, is such that demand would be `futile.'"); see also Act of May 26, 1973, 63rd Leg., R.S., ch. 545, § 37, 1973 Tex. Gen. Laws 1486, 1508-09 (amended 1997) (expired January 1, 2010) (allowing for derivative shareholder plaintiffs to plead demand futility). Some courts reasoned that the demand futility requirement was "not merely an informal procedural step, but rather a requirement necessitating proof at trial." E.g., Zauber, 591 S.W.2d at 938.
In essence, the defendants ask us to resurrect the demand futility requirement, not simply as a procedural hurdle, but as an element of a shareholder's standing to pursue a derivative proceeding on behalf of a closely held corporation. Again, we decline this invitation to add a requirement that the Legislature has intentionally omitted.
Turning our attention back to Cates, there the Court examined the other two elements for a shareholder to assert a derivative action against a corporation's officers or directors: "Such breach of duty by the directors or officers of the company, and such injury to the plaintiff's stock, essential to maintain the action."
The defendants confuse standing with an issue that goes to the merits.
Accordingly, the pronouncement of the business judgment rule in Cates, with respect to breaches of duty, goes "in reality to the right of the plaintiff to relief rather than to the jurisdiction of the court to afford it." See Dubai Petroleum Co., 12 S.W.3d at 76-77 (quotation omitted). It is insufficient for a shareholder plaintiff to allege a derivative right to relief against a corporation's officers or directors for breach of a duty based upon "mere mismanagement or neglect ..., or the abuse of discretion lodged in them in the conduct of the company's business." Cates, 11 S.W. at 849. Such allegations may be disposed of on special exceptions or summary judgment.
Today's decision follows our recent opinion in Ritchie. In Ritchie, while discussing the successor statute to article 5.14, we recognized that "the Legislature has enacted special rules to allow its shareholders to more easily bring a derivative suit on behalf of the corporation." Ritchie, 443 S.W.3d at 880-81 (emphasis added) (citing TEX. BUS. ORGS. CODE § 21.563). This legislatively imposed ease of court accessibility enables shareholders of closely held corporations to bring derivative actions "without having to prove that they `fairly and adequately represent[] the interests of' the corporation, without having to make a `demand' upon the corporation, as in other derivative actions, and without fear of a stay or dismissal based on actions of other corporate actors in response to a demand." Id. (citations omitted). Despite the Legislature's removal of these impediments to promote greater court accessibility for shareholders of closely held corporations, the defendants propose an additional judicially created barrier. As we stated in Ritchie, "we will refrain from imposing additional claims or procedures that may upset the Legislature's careful balance of policies and interests." Id. at 880 (citation omitted). We emphasized in Ritchie the availability of the shareholder derivative action and other existing remedies in the
Not only does today's decision align with Cates and Ritchie, but our holding is also consistent with this Court's other jurisprudence on shareholder lawsuits. The defendants rely on several statements from Massachusetts v. Davis, 140 Tex. 398, 168 S.W.2d 216 (Tex.1942), and Wingate v. Hajdik, 795 S.W.2d 717 (Tex.1990), regarding the unavailability of direct shareholder recovery for injuries to the corporation. Both cases stand for the proposition that shareholders have no individual or direct claims for injuries to the corporation. See Wingate, 795 S.W.2d at 719; Davis, 168 S.W.2d at 221. These holdings are reflected in our statutes. Under article 5.14(L), there is not an absolute right for a shareholder to recover directly for claims based on corporate injuries. Rather, if justice requires, a court may treat a derivative proceeding like a direct action and allow the shareholder to recover directly. TEX. BUS. CORP. ACT art. 5.14(L). But the proceeding still must be derivative. See id.; Swank v. Cunningham, 258 S.W.3d 647, 665 (Tex.App.-Eastland 2008, pet. denied) ("A trial court's decision to treat an action as a direct action ... so as to allow recovery to be paid directly to a shareholder plaintiff, as opposed to the corporation, does not mean that the action is no longer a derivative proceeding."). In Wingate, the Court simply held that a shareholder may still recover damages "for wrongs done to him individually `where the wrongdoer violates a duty arising from contract or otherwise, and owing directly by him to the stockholder.'" 795 S.W.2d at 719 (quoting Davis, 168 S.W.2d at 222). But to recover in an individual capacity for non-derivative claims, the shareholder "must prove a personal cause of action and personal injury." Id.
Further, the case of Pledger v. Schoellkopf, 762 S.W.2d 145 (Tex.1988) (per curiam), which the defendants rely upon in support of their standing argument, is not inconsistent with our holding today. Pledger involved a shareholder's cross-claim against fellow shareholders for fraud, tortious interference with business relationships, and material misrepresentations. Id. at 145. The court of appeals reversed a jury verdict that was in the plaintiff's favor because the causes of action belonged to the corporation and the plaintiff and cross-defendants were its shareholders. Id. This Court held that the shareholder plaintiff was entitled to recover because the cross-defendants waived their right to complain about the capacity in which the shareholder plaintiff sued them by failing to file a verified denial under Texas Rule of Civil Procedure 93(2). Id. at 146. "When capacity is contested, Rule 93(2) requires that a verified plea be filed anytime the record does not affirmatively demonstrate the plaintiff's or defendant's right to bring suit or be sued in whatever capacity he is suing." Id. (citing TEX. R. CIV. P. 93(2)). The Court did not address whether a shareholder plaintiff's pleadings must overcome the business judgment rule to sue on behalf of a corporation in a representative capacity.
Finally, as Webre points out, our decision in Eye Site, Inc. v. Blackburn, 796 S.W.2d 160 (Tex.1990), cuts against the defendants' position. At the outset of that opinion, the Court made a point to "confirm that the complaints raised by [the shareholder plaintiff] belong exclusively to
Accordingly, we reaffirm that when a shareholder of a closely held corporation brings a derivative proceeding "in compliance with our corporation laws and our derivative action rule, ... he has standing to pursue the corporation's claim." Id. Through sections (B) through (H) of article 5.14, the Legislature has given directors of publicly traded corporations the ability to exercise their business judgment in handling the corporation's legal disputes. See TEX. BUS. CORP. ACT art. 5.14(B)-(H). By virtue of article 5.14(L), closely held corporations do not have the same deference to their boards of directors' decision-making with respect to pursuing corporate causes of action. See id. art 5.14(L). When a closely held corporation is injured, and such an injury decreases the value of its shares, its shareholders have standing to pursue the corporation's causes of action derivatively. Thus, courts have jurisdiction to decide shareholder derivative litigation brought on behalf of closely held corporations, and it is immaterial whether the board of directors approves or disapproves of the derivative litigation. The court of appeals properly concluded that the business judgment rule does not deprive Webre of standing to assert a derivative proceeding on behalf of a closely held corporation in this case. See 358 S.W.3d at 335-37.
We next address whether the court of appeals erred in recognizing the concept of double-derivative standing. "In a `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 possessed by the subsidiary." Blasband v. Rales, 971 F.2d 1034, 1043 (3rd Cir.1992) (quoting 13 CHARLES R.P. KEATING, GAIL A. O'GRADNEY, FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 5977 (rev. ed.1991)). Texas United is the sole shareholder of United Salt. Webre asserts that he has standing to bring a derivative suit on behalf of United Salt because he is a shareholder of United Salt's only shareholder, which provides him with a beneficial or equitable ownership
In the TBCA, a shareholder is defined to mean "the person in whose name shares issued by a corporation are registered at the relevant time in the share transfer records maintained by the corporation." TEX. BUS. CORP. ACT art. 1.02(A)(22). In the "Derivative Proceedings" provisions, article 5.14(A)(2) defines a shareholder: "`Shareholder' includes a beneficial owner whose shares are held in a voting trust or by a nominee on the beneficial owner's behalf." Id. art. 5.14(A)(2) (emphasis added). Under the Code Construction Act, "`[i]ncludes' and `including' are terms of enlargement and not of limitation or exclusive enumeration, and use of the terms does not create a presumption that components not expressed are excluded." TEX. GOV'T CODE § 311.005(13).
Turning to Roadside, which Webre relies upon for its recognition of equitable ownership, there the court addressed a question of first impression of "whether a stockholder in the parent company can bring a suit on behalf of a subsidiary." Roadside Stations, Inc., 904 S.W.2d at 930. At that time, the pre-1997 version of the TBCA stated that a derivative suit may be brought if "[t]he plaintiff was a record or beneficial owner of shares ... at the time of the transaction of which he complains." Id. (citing the pre-1997 version of TEX. BUS. CORP. ACT art. 5.14(B)(1), Act of May 26, 1973, 63rd Leg., R.S., ch. 545, § 37, 1973 Tex. Gen. Laws 1486, 1508-09 (amended 1997) (expired January 1, 2010)). The court ultimately answered the question by holding:
Id. at 931 (citations omitted).
In the instant case, the court of appeals applied Roadside's reasoning and held that Webre's ownership of Texas United stock made him an "equitable owner of stock in United Salt because Texas United owns all of the stock in United Salt." 358 S.W.3d at 333 (citing Roadside Stations, Inc., 904 S.W.2d at 931). In reaching its decision, the court of appeals explained that the post-1997 version of article 5.14(A) allows a "shareholder" to bring a derivative lawsuit, and "the applicable version of article 5.14(A) does not exclude `equitable owners' from its definition of a shareholder." Id. (citing TEX. BUS. CORP. ACT art. 5.14(A)(2)).
The Court recognized that "the stockholders are the beneficial owners of the assets of the corporation" well over a
Milner v. Milner, 361 S.W.3d 615, 620-21 (Tex.2012). Some courts have phrased this concept of beneficial ownership or interest as one of equitable ownership. E.g., Cotten v. Weatherford Bancshares, Inc., 187 S.W.3d 687, 697 (Tex.App.-Fort Worth 2006, pet. denied), disapproved of on other grounds by Ritchie, 443 S.W.3d 856 ("[S]hareholders of a corporation are equitable or beneficial owners of the corporation's assets."); Martin v. Martin, Martin & Richards, Inc., 12 S.W.3d 120, 124 (Tex. App.-Fort Worth 1999, no pet.) (stating that "[t]he shareholders of a corporation are the equitable owners of its assets," and that shareholders are the "beneficial owners of corporate property"); Boston & Tex. Corp. v. Guarantee Life Ins. Co., 233 S.W. 1022, 1024 (Tex.Civ.App.-Galveston 1921, writ ref'd) ("[T]he doctrine that the stockholders of a corporation are in final analysis the equitable owners of its property.... is well fortified by authority in Texas, as well as elsewhere."). No matter the terminology, this Court has never called into doubt the now familiar understanding that "the stockholders are the [beneficial or equitable] owners of the assets of the corporation." See Aransas Pass Harbor Co., 63 S.W. at 629.
Accordingly, we agree with Roadside and the court of appeals' reasoning. Article 5.14(A)(2)'s definition of a shareholder uses the term "includes," which "does not
Were we to hold otherwise, the directors of a closely held holding corporation could create a wholly owned subsidiary to circumvent the Legislature's intent to make it easier for shareholders to assert derivative proceedings on behalf of closely held corporations. See id. In considering this precise issue, the Supreme Court of Illinois recognized that refusal to recognize double-derivative standing would leave "[a] shareholder of record in the holding company... without remedy, even where ... the holding company is the wrongdoer." Brown v. Tenney, 125 Ill.2d 348, 126 Ill.Dec. 545, 532 N.E.2d 230, 233 (Ill.1988). "The additional layer in the corporate structure would prevent the righting of many wrongs and would insulate the wrongdoer from judicial intervention." Id. (citation omitted); cf. Zauber, 591 S.W.2d at 937 ("The reasoning behind allowing a shareholder to maintain a suit in the name of the corporation when those in control wrongfully refuse to maintain it is that a shareholder has a proprietary interest in the corporation."). We believe such a result would be contrary to the Legislature's intent in removing the restrictions for shareholder derivative proceedings in the closely held corporation context. Thus, in the closely held corporation context, we reject "an interpretation [that] could deprive the corporation of any remedy it might have as the result of wrongs done it
It is axiomatic that standing to assert a derivative action on behalf of a wholly owned subsidiary requires standing to assert a derivative action on behalf of the parent corporation. As 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. The court of appeals did not err in reaching the same conclusion. See 358 S.W.3d at 332-34.
The Legislature's enactment of the TBCA did not alter the way the business judgment rule applies to the merits of derivative lawsuits alleging that the directors or officers of a closely held corporation breached their duties to the corporation. To achieve standing to assert a derivative proceeding under TBCA article 5.14, a shareholder of a closely held corporation is not required to plead and prove that the board of directors acted outside of the protections of the business judgment rule in deciding not to pursue the corporation's cause of action. Finally, we hold that Texas law recognizes the availability of double-derivative standing for shareholders of a closely held parent corporation to assert a derivative action on behalf of a wholly owned subsidiary. The court of appeals correctly reversed the trial court's grant of the defendants' pleas to the jurisdiction and motions to dismiss. We affirm the court of appeals' judgment and remand this case to the trial court for further proceedings.
