One of the clearest statements on the relationship between shareholders and their corporation was given by the Texas Supreme Court in the case of Yeaman v. Galveston City Corp., decided in 1914. That case had its genesis in a property dispute that occurred less than a year after the Battle of San Jacinto. In April of 1837, M. B. Menard, a signer of the Texas Declaration of Independence and one of the founders of the City of Galveston, who “claimed to own the whole of the league and labor of land granted to him by the republic of Texas situated on the east end of Galveston Island,” got into a dispute with Robert Triplett, a Kentucky speculator who had helped finance the Texas Revolution and who claimed ownership of the same land. A compromise was reached whereby the parties conveyed the land to Thomas Green, Levi Jones, and William R. Johnson in trust, to be subdivided and sold for the benefit of Triplett and his co-owners. The land was placed in a joint stock company and represented by 1000 shares of stock, which were then offered to investors in June 1837. The first stockholders’ meeting was held in Galveston on April 13, 1838, where the stockholders organized the company, elected directors, and named the company the “Galveston City Company.” The company was incorporated in 1841 by an act of the Congress of the Republic of Texas, and “[a]ll stockholders in the joint-stock company were . . . made stockholders in the corporation.”
Robert Triplett died in 1853 without having disposed of five of the original trust certificates, which he never exchanged for share certificates in the corporation. The petition in the lawsuit alleged: “Robert Triplett was a careless man, and left his papers in great confusion. [S]earch among such of his papers as petitioners can find fails to disclose said certificates, and petitioners aver that said 5 certificates are lost or destroyed.” His descendants did not discover his ownership of the original five certificates until August 1909, at which time they sued the Galveston City Company and its president, individually, to establish their rights as stockholders, for an accounting and recovery of 72 years of dividends, and to enjoin the proposed dissolution of the corporation by the majority of its stockholders.
The Texas Supreme Court first had to determine whether Triplett had been a shareholder in the corporation or had only had the right to become one—a right which would have been lost due to the statute of limitations—and to determine the legal effect of his never having received stock certificates in the corporation. The Court held that Triplett had become a stock holder by virtue of having fulfilled his subscription agreement and that his failure to obtain a stock certificate was irrelevant: “[I]n a corporation the certificate of stock is not the stock itself; it is but a muniment of title, an evidence of the ownership of the stock. It is not necessary to a subscriber’s complete ownership of the stock. He becomes a full stockholder, certainly where he has performed his obligation, and possession all of a stockholder’s rights, even if no certificate is issued to him at all.”
The Court then turned to the thornier issue of limitations and the plaintiffs’ 72-year delay in asserting their rights—particularly, whether the corporation could be forced to pay 72 years’ worth of dividends. The Court’s answer was based on the nature of the legal relationship between stockholder and corporation and the legal duties that the corporation owes to its stockholders arising from that relationship.
A corporation “is a trustee for the interests of its shareholders in its property, and is under the obligation to observe its trust for their benefit.”
The Court held that a corporation “is a trustee for the interests of its shareholders in its property, and is under the obligation to observe its trust for their benefit.” “[T]he trusteeship of a corporation for its stockholders is that of an acknowledged and continuing trust. It cannot be regarded of a different character. It arises out of the contractual relation whereby the corporation acquires and holds the stockholder’s investment under express recognition of his right and for a specific purpose. It has all the nature of a direct trust.” Because the law imposes on the corporation the duties of a trustee, the Court held: “Its possession is friendly, and not adverse, and the shareholder is entitled to rely upon its not attempting to impair his interest.” Because the shareholder is the beneficiary of the trust, “[h]e is chargeable with no vigilance to preserve his stock or its fruits from appropriation by the corporation, but may confide in its protection for their security.”
Therefore, the Court rejected the corporation’s defense of limitations on the shareholder’s descendants’ 72-year-old claims for cancellation of their shares and for an accounting and for payment of dividends. “And when a corporate act is invoked as a repudiation of a shareholder’s stock or a conversion of its profits, before affecting his rights with limitation, it is only just to require that he or those standing in his stead have notice of it.” “Statutes of limitation have no application until there is a clear and unequivocal disavowal of the trust, and notice of it brought to the cestui que trust.”
While Yeaman is a very old case, the legal relationship between a corporation and its shareholders as a particular type of trust has been often repeated, never denied or limited, and is very well established in Texas case law. As recently as 1995, the Amarillo Court of Appeals in Disco Machine v. Payton, noted "Historically, the relationship between corporation and shareholder was akin to one of trust." The corporate trustee relationship “arises out of the contractual relation whereby the corporation acquires and holds the stockholder’s investment.” The corporate trustee holds legal title to its assets and business, but that legal title is held for the benefit of the shareholders, who are the equitable and beneficial owners of the corporation’s assets. “In a larger or real sense the stockholders of a corporation are the beneficial owners of its corporate properties.” The legal relationship of corporate trustee to shareholder beneficiary imposes fiduciary duties on the corporate trustee. In Yeaman, those duties included the duty to recognize the ownership of a shareholder and the transfer of that ownership to his heirs, not to attempt to impair that ownership, and to account to the shareholder for his proportional share of corporate profits distributed through dividends. The specific equitable relief granted to the plaintiffs was the restoration of their ownership status and rights and the remedy of an accounting with respect to their dividends.
Yeaman also clearly held that an individual shareholder has a direct cause of action against the corporation, on his own behalf, for the violation of the duties of the corporate trustee. With respect to a shareholder’s right to participate in a corporation’s profits through dividends, the Yeaman Court wrote: “There can be no substantial difference between the trusteeship of a corporation as it relates to the stock of a shareholder and its duty to him in respect to the profits or dividends upon his stock.” And, as the Texas Supreme Court would hold about forty years later in Patton v. Nicholas, “the malicious suppression of dividends is a wrong akin to breach of trust, for which the courts will afford a remedy.” The Supreme Court’s use of the phrase “breach of trust” to describe suppression of dividends in Patton v. Nicholas was no accident, and it was not an archaic way of referring to the fiduciary duties that directors owe only to the corporation and not to the minority shareholders. The phrase “breach of trust” was first used in this context in the 1855 United States Supreme Court case of Dodge v. Woolsey, in which that Court wrote: “It is now no longer doubted, either in England or the United States, that courts of equity, in both, have a jurisdiction over corporations, at the instance of one or more of their members; to apply preventive remedies by injunction, to restrain those who administer them from doing acts which would amount to a violation of charters, or to prevent any misapplication of their capitals or profits, which might result in lessening the dividends of stockholders, or the value of their shares, as either may be protected by the franchises of a corporation, if the acts intended to be done create what is in the law denominated a breach of trust.” The holding in Dodge v. Woolsey specifically related to ultra vires acts that “might result in lessening the dividends,” but the Texas Supreme Court, in later reviewing that landmark case, wrote: “After repeated efforts minority stockholders were successful in establishing their right to relief in courts of equity. It was first established in America in the case of Dodge v. Woosley, decided by the Supreme Court of the United States in 1855. . . . The doctrine announced  has become thoroughly established as the law both in England and America. The rule in this regard is tersely stated by Mr. Cook in his splendid treatise on Stock and Stockholders, ‘that where corporate directors have permitted a breach of trust either by their fraud, ultra vires acts, or negligence.’” Over the years, courts frequently listed “breach of trust” as one of the grounds on which a court of equity might disturb a decision by a board of directors regarding dividends. Both of the cases on which the Patton Court principally relied as authority for its substantive holding that a court may grant equitable relief for a suppression of dividends quote
the breach of trust language from Dodge v. Woolsey. The Michigan Supreme Court case of Miner v. Belle Isle Ice Co., in particular, added this application of the “breach of trust” notion in the context of suppression of dividends: “The present case furnishes an instance of gross abuse of trust. Must the cestui que trust be committed to the domination of a trustee who has for seven years continued to violate the trust? The law requires of the majority the utmost good faith in the control and management of the corporation as to the minority. It is of the essence of this trust that it shall be so managed as to produce for each stockholder the best possible return for his investment. The trustee has so far absorbed all returns.”
|About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more||
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