Morrison v. St. Anthony Hotel, San Antonio, was a case decided one year after Patton v. Nicholas. Morrison heavily relied on Patton and applied exactly the same cause of action recognized in Patton, breach of trust based on malicious suppression of dividends. The Texas Supreme Court refused the writ in Morrison for no reversible error. If the opinion in Patton was at all ambiguous as to whether there were any derivative claims in the pleadings, the Morrison opinion was not.
The plaintiff was a former stockholder in The St. Anthony Hotel, and sued that corporation, together with its directors and the Pan American Hotel Company, which owned the majority of the stock of The St. Anthony, for malicious suppression of dividends. In 1948, the plaintiff and Pan American had been engaged in another suit, which they settled by executing a written settlement agreement. The settlement provided for the formation of The St. Anthony Hotel corporation to operate a hotel property owned by Pan American, which would hold 52% of the stock in the new corporation. The minority shareholders, including the plaintiff, were to receive dividends of all the net earnings of the new corporation up to $130,000. The stock certificates specifically required the directors to declare dividends of all net earnings to the shareholders each year. The settlement agreement also provided that Pan American would have a continuing option to purchase the minority stock at a price to be determined by the company auditor.
In 1952, Pan American exercised its option to buy the minority stock. Morrison then filed suit, claiming that the option was invalid and that he still owned the stock, and claiming breach of contract for failure to pay dividends and breach of trust for conduct by the majority stockholder causing “the malicious depression  of his dividends and stock values.” The court of appeals specifically noted that the lawsuit included claims for “damages which he claims he individually suffered by reason of certain mismanagement practices and a breach of trust on the part of the majority stockholder, which conduct resulted in depressing his dividends and stock values.”
The ownership issue was severed and tried first, with the trial court holding that the plaintiff no longer owned his stock and upholding the valuation set by the auditor on which the purchase option had been exercised. That holding was affirmed on appeal. The case then went forward on the dividend claims. The trial court sustained a plea of res judicata and a special exception which stated that plaintiff had failed to assert a cause of action.
The court of appeals rejected the res judicata holding on the grounds that the dividend claims were not part of the severed proceeding. The court of appeals reversed the dismissal of the contract claim, holding that the minority shareholders were contractually entitled to dividends on all net earnings and that the corporation had failed to pay dividends on all net earnings. The court then turned to consider the breach of trust claim that was based on the “rights of minority stockholders apart from the objectives intended by the 1948 settlement agreement.”
The breach of trust claim was different in substance from the contract claim. The breach of trust claim was not based just on the failure to pay all the dividends required but on the intentional and malicious conduct by the majority shareholder to reduce the amount of the net earnings available for the payment of dividends during the period of time that earnings were to be paid out in dividends to the plaintiff’s class of stock and ultimately to drive down the valuation of the corporation in anticipate of the defendants’ exercise of its option to purchase. Plaintiff pleaded that “The St. Anthony’s controlled board of directors charged certain salaries and directors’ fees against The St. Anthony when they, by agreement, should have been charged to Pan American; that at one time when earnings amounted to $131,000, the board declared dividends of $50,000, conditioned upon [plaintiff’s] written approval, failing which they told him they would declare only $40,000 dividends. He pleaded further that Pan American paid itself $95,863 out of operating cash for a debt which was not due until December, 1979. He alleged that the defendants maliciously mismanaged the corporation for the wrongful purpose of reducing the minority’s earnings and to suppress their dividends.”
The trial court had sustained special exceptions to the cause of action for dividends and damages, which the court of appeals stated raised the following questions: “Does a stockholder have any rights to dividends prior to the time they are declared? Does a stockholder have any rights incident to the stock after the exercise of an option to buy his stock? Does a former stockholder, independent of the corporation’s rights to redress damage, individually have an action against the majority stockholder for breach of its trust toward the minority stockholder for mismanagement and the malicious refusal to declare dividends and suppress stock values?” The court of appeals stated that the “answer to the first two questions is ordinarily in the negative but there are exceptions to the rule.” The court held: “Under certain circumstances, not only stockholders, but former stockholders, may assert an action for their own damages. The general rule does not prevent stockholders from suing to restrain, or recover damages for, wrongful acts which are not only wrongs against the corporation but also violations of duties arising from contracts or otherwise and owing directly to the injured stockholders.” The court stated “Texas recognizes this exception to the general rule.”
Unlike in Patton, the direct/derivative issue in Morrison was central and squarely before the court: Was there a legal duty owed individually to the shareholder that would support a direct cause of action for equitable relief or damages arising from the failure to pay dividends? The court’s answer was in the affirmative: “Generally, it is the corporation and not the stockholders which must redress wrongs which weaken corporate values. But in a proper case, where a majority stockholder has abused its discretion and has maliciously suppressed the payment of dividends, a stockholder may assert a cause of action for damages and may compel the declaration of dividends.” As authority for this proposition, the court of appeals cited Patton v. Nicholas. The court further stated that “the duty of corporations, such as Pan American in this case, which own controlling stock in a subsidiary corporation . . . is one of trust and strong presumptions come into force against the management which pays itself enormous management fees and refuses to pay dividends.”
When a majority of the stock of one corporation is owned by another, which thereby acquires the right to control its management, the controlling corporation assumes a relation of trust towards the minority stockholders of the corporation controlled, and is under an obligation to manage its affairs for the benefit of all the stockholders and not for its own aggrandizement. This is merely an application of the principle that, while a majority of the stockholders may legally control the corporation’s business, they assume the correlative duty of good faith, and cannot manipulate such business in their own interest to the injury of minority stockholders.
The court concludes that the plaintiff had asserted valid causes of action “against The St. Anthony Hotel and Pan American Hotel Company, both under the contract by which the minority would receive all net earnings of The St. Anthony Hotel and on the breach of trust theory for damages.” The court of appeals reversed the dismissal and remanded for trial.
Morrison was clearly an example of an individual action brought by the minority shareholder for his own benefit based on duties owed to himself. The plaintiff was not a shareholder at the time of the litigation. The first sentence of the opinion identifies the plaintiff as “R. E. Morrison, a former stockholder in The St. Anthony Hotel.” As such, the plaintiff could not have brought the action as a derivative claim, a point made clearly in the dissent. The fact that the plaintiff was no longer a shareholder also raises an important distinction between the remedies granted in Morrison and in Patton. In Patton, the plaintiffs were still shareholders and the funds were still in the corporation; therefore, a mandatory injunction that to pay dividends made the plaintiffs whole. In Morrison, the plaintiff was no longer a shareholder and could no longer receive dividends, and the claim in Morrison was not that the money was sitting there, but that the finances had been manipulated to reduce the funds available for dividends and that the money available for distribution had been taken out of the corporation. The plaintiff in Morrison was not in a position to benefit from an injunction to pay dividends and did not have standing to bring a derivative claim for misappropriation of assets. The only possible remedy was one for damages based on a breach of duty owed to the plaintiff individually.
As did Patton, Morrison characterized the breach of duty as a “breach of trust.” The malicious conduct in Morrison resulting in the loss of dividends to the minority shareholder was also clearly an example of a claim for what Cates v. Sparkman termed “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” for which no other remedy existed. In the intervening years, the Morrison opinion has been cited repeatedly as good authority. In Wingate v. Hajdik, the Texas Supreme Court held that the general rule
that shareholders have no individual cause of action for harm done solely to the corporation “does not, of course, prohibit a stockholder from recovering 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.” Wingate cited Morrison as a specific example of an individual claim by a shareholder “arising from contract or otherwise.” In both the 2014 Ritchie v. Rupe opinion and the 2015 Sneed v. Webre opinion, the Texas Supreme Court cited Wingate for that same proposition, although neither mention Morrison.
|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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