Call for an appointment 888-481-9995

Share Ownership Rights and Conversion

A corporation has a quasi-fiduciary duty to its shareholders to recognize and respect their share ownership and not to attempt to impair ownership interests.

share ownership

Sanctity of Share Ownership 

Perhaps the most obvious and central right of ownership is the assurance that the law will protect the existence and continuation of that ownership—every property owner has “the right to exclusive possession” and “the right to security.”  The stockholder is an owner. The stock is his property. It cannot be taken away without his consent. 

The peculiar nature of share ownership adds a significant diminsion to this right of ownership. Not only does the law protect the shareholder's property rights, but the corporation is under an affirmative duty to acknowledge the share ownership of each shareholder and may not act to impair the shareholder’s ownership interest.  The stockholder has the right to have his ownership recorded on the books of the corporation and to have issued and delivered a stock certificate as written evidence of that ownership. Ownership of stock, after all, is nothing more than a set of intangible rights that the shareholder has against the corporation. If the corporation fails to recognize the ownership interest of the stockholder, then the corporation has effectively negated that ownership.

Duty to Acknowledge and Preserve Share Ownership Rights

As the Texas Supreme Court held in Yeaman v. Galveston City Co., the corporation has a fiduciary duty to recognize, to respect, and not to attempt to interfere with a shareholder’s ownership: “The shareholder is entitled to rely upon [the corporation’s] not attempting to impair his interest. He . . . may confide in its protection for their security.”  The Texas Supreme Court has held repeatedly that corporation “holds bare legal title”  but it must recognize always that the shareholder is the “real owner.”  Absent some statutory or charter power, or the express consent of the shareholder, a corporation has no authority to forfeit a shareholder’s stock.

As a trustee, the corporation is also under a duty to the beneficiaries to administer the trust solely in the interest of the beneficiaries.  A shareholder’s stock ownership includes a number of rights and interests, and the corporation has a duty not to “impair his interest.”  Trust law recognizes that the profits belong to the beneficiaries, not to the trustee.  Therefore, the Yeaman Court held that the corporation’s duty to its shareholders is to “to observe its trust for their benefit”  and to preserve both the stock and its “fruits.” 

Issuance of Share Certificates to Evidence Ownership

Unless its shares are uncertificated, a corporation must deliver to its shareholders certificates, signed by such officer or officers as prescribed by the bylaws, representing all shares to which the shareholders are entitled. BOC 3.201-04. Nevertheless, because the certificate is not the stock in the corporation, but rather, a muniment of title that only evidences ownership of the stock, it is not necessary for complete ownership of the stock that a certificate even be issued. However, a shareholder may demand issuance of a signed certificate as evidence of his stock ownership. A shareholder who demands a certificate to replace one which has been lost must comply with any reasonable requests by the corporation for additional information concerning the lost certificate in order to obtain a substitute certificate. 

Registration of Share Ownership After a Transfer

If a corporation wrongfully refuses to register transferred shares in the name of the new shareholder, the shareholder may sue for mandamus, injunctive relief, or conversion. At least one court has complicated the issue in holding that a cause of action for conversion was not established when the corporation refused to register the transfer because appeals by the parties in dispute had not been exhausted. Moreover, one federal district court has refused to grant a preliminary injunction to prevent the allegedly wrongful transfer of a certificated security to a third party. The court held that, despite the statute's express authorization of
injunctive relief, the requirements of a preliminary injunction are procedural and the plaintiff had not demonstrated irreparable harm. In the case of uncertificated securities, a registered pledgee seeking transfer through registration simply issues an "instruction" to the issuer to make the transfer. Tex. Bus. & Comm. Code § 8.401 (a); § 8.207(d). If the various requirements are met, the issuer must register the transfer, and it is effective once it is registered on the issuer's books. § 8.313(a)(2); 8.401(a).

Legal Protection of Share Ownership Rights

Share ownership rights and status are protected by the law in a number of ways. In addition to various provisions of the Texas Business Organizations Code, which may be enforced by courts through injunction, mandamus, or statutory penalties, the common law tort of conversion is the primary protection from interference with ownership. Claims for dilution and based on preemptive rights also safegard stock ownership from unlawful attempts to diminish it.

Houston_Business_Lawyer_Eric_Fryar.jpg 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

 

Next: Conversion >

 

Share the content
Retain Fryar Law Firm for an Initial Consultation Click Here
Future of Shareholder Oppression Law

Follow Us

Tell Me More About Fryar Law Firm

Fryar Law Firm knows share ownership.
Request our brochure WORKING WITH FRYAR LAW FIRM

This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

Fryar Law Firm Top 50 Verdicts in the Nation 2015Fryar Law Firm Largest 2015 Fraud Verdict in Texas
Filling In The Gaps Part 1 Published! Download your Copy Today
Retain Fryar Law Firm for an Initial Consultation Click Here