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The Rights Of Shareholders Of Small Companies

Jim M. Zadeh
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Attorney at Law
Posted on Jun 01, 2015

a graphic design showing the shareholder in the middle while others surround him but are connected

May 29, 2015, the Texas Supreme Court decided Sneed v. Weber ("Sneed")

In Sneed, the Court discussed whether a shareholder can sue the directors of a Texas closely held corporation for bad decisions.  The Texas Supreme Court held that a shareholder can sue the directors as long as the shareholder sues on behalf of the corporation.

A closely held corporation has fewer than 35 shareholders and has no shares listed on national exchanges or regularly quoted in an over the counter market by a member of a national securities association.  In Sneed, Texas United Corporation was a closely held corporation and owned 100% of a subsidiary company, United Salt Corporation.  Lloyd Weber was a shareholder of Texas United and warned the board of directors that the board's decision to buy another company was a very bad decision and would result in millions of dollars in losses to Texas United and United Salt.  Weber visited the company that United Salt intended to buy and sent a letter detailing his concerns.  Texas United and United Salt ignored Weber's warnings and bought the company.  As Weber predicted, the deal was bad and Texas United and United Salt lost in excess of $7,000,000.  Weber then sued the members of the board of directors individually.  Weber sued on behalf of Texas United and United Salt and any recoveries that Weber obtained from the lawsuit would go to Texas United and United Salt and not Weber individually.

The trial court dismissed the case saying Weber could not sue because the board of directors were simply exercising their business judgment and, thus, Weber did not even have standing to bring the suit.  The Court of Appeals reversed the trial court's decision saying that Weber could bring the lawsuit.  The Texas Supreme Court agreed with the Court of Appeals and held Weber could bring the suit.

In the Sneed decision, the Texas Supreme Court made several significant statements that impact directors of closely held corporations.  The Court held that the business judgment rule, a rule which protects directors from liability to the company if their actions were within the exercise of their discretion and judgment in development of the business, does apply to closely held corporations and cases brought by shareholders on behalf of corporations.  However, the business judgment rule does not prevent a shareholder from initially bringing a lawsuit on behalf of a closely held corporation.

This decision clarifies the rights of shareholders of small companies.  Law Office of Jim Zadeh, P.C. represents both small companies and individual shareholders.  If you or someone you know has any questions about their rights and remedies in a similar situation, please feel free to give us a call or send us an email.