TEXAS SUPREME COURT TO HEAR ARGUMENTS IN SHAREHOLDER’S DOUBLE DERIVATIVE ACTION

On March 21, 2014, the Texas Supreme Court granted Texas United Corporation’s, United Salt Corporation’s, and their directors’ and officers’ petition for review and will hear oral arguments on whether the Court of Appeals erred in reversing a trial court’s decision to grant their pleas to the jurisdiction that dismissed the case. The plaintiff, Lloyd Webre, is a director of both Texas United and United Salt (both closely held corporations) and is a 24% shareholder of Texas United. Texas United, in turn, owns 100% of United Salt’s stock. In 2009, Webre filed suit individually and derivatively on behalf of Texas United and United Salt against the companies’ other directors and officers. Webre accused them of breaching their fiduciary duties to Texas United and United Salt when they approved United Salt’s purchase of a salt mining and storage facility in Saltville, Virginia. The alleged breaches were based on the failure to fully investigate the acquisition, misrepresentations to the companies’ boards, and simultaneous approval of related transactions with affiliated entities. The trial court granted the defendants’ pleas to the jurisdiction and dismissed the case because Webre, although a shareholder of Texas United, lacked standing to bring the suit because he was not a shareholder of United Salt.

The intermediate appellate court reversed, holding that Webre had standing to bring a derivative claim on behalf of United Salt. The court concluded that Webre, as a shareholder in Texas United, is an equitable owner of the stock in United Salt, Texas United’s wholly owned subsidiary, and thus “can be properly considered a shareholder for purposes of bringing a derivative suit on behalf of United Salt.” The court relied on the fact that many other jurisdictions (including Delaware) recognize this so-called “double derivative” action. The court also rejected the defendants’ separate argument that the business judgment rule protected their conduct, reasoning that the business judgment rule does not apply to a closely held corporation. The defendants filed a petition for review that the Texas Supreme Court granted to determine whether Texas recognizes a plaintiff’s standing in a “double derivative” action and whether the business judgment rule applies in this context.

The Court of Appeals’s decision is Webre v. Sneed, 358 S.W.3d 322 (Tex. App.—Houston [1st Dist.] 2011, pet. granted). A date and time for oral argument has yet to be determined.