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Tort of Conversion: Dominion and Control

The second element of the tort of conversion is dominion and control. How does a minority shareholder prove dominion and control over his stock?

tort of conversion

Proving the Tort of Conversion

The essential element of the tort of conversion is the exercise of "dominion or control" over the property of the plaintiff. “Conversion is the wrongful exercise of dominion or control over the property of another in denial of, or inconsistent with, the other’s rights in the property.”  To constitute conversion, there must be “some repudiation of the owner’s right or an exercise of dominion over the property, wrongfully and in denial of or inconsistent with that right; or there must be an illegal assumption of ownership.” Physical possession of an object is the most obvious example of wrongful dominion or control, but there is no requirement of a physical taking. Also there is no requirement that the interference be permanent. Any action that affects the property or interference with the plaintiff's use and enjoyment of the property in a manner that violates or impairs any of the plaintiff's property rights may constitute "dominion or control" for purposes of proving the tort of conversion. Conversion may also be some “alteration of the[] condition [of the property] or the exclusion of an owner’s rights.”

Dominion or Control in the Tort of Stock Conversion

As we noted in our descussion of the unique development of the stock conversion tort in Texas, a shareholder does not possess his stock. The corporation is deemed always to be in physical possession of the stock. While a stockholder may physically possess a stock certificate, that possession is largely irrelevant to the tort of conversion. A plaintiff's stock may be converted even if the plaintiff still retains possession of the share certificate. A plaintiff's stock may be converted even if the plaintiff does not possess a stock certificate or even if one was never issued. In fact, one Texas court has held that the wrongful possession of a plaintiff's stock certificates was insufficient to establish the tort of conversion with respect to the stock. 

The tort of stock conversion is primarily concerned with interference with shareholders rights.  The corporation is seen by the law as holding the shareholder's stock in trust for his benefit. Therefore, whenever the corporation acts toward the shareholder in a manner "in denial of, or inconsistent with, the [shareholder's] rights in the property," the corporation has exercised dominion or control over the stock and has committed the tort of conversion. The United States Court of Appeals for the Fifth Circuit has held that the "dominion or control" element in a stock conversion tort claim is stated as follows: "A corporate act that destroys or impairs the stock’s value." Under that definition, the tort of stock conversion may reach a great many wrongful acts toward minority shareholders. Texas courts have already recognized that a corporation commits the tort of conversion when it improperly cancels the plaintiff's stock, when it refuses to recognize a valid transfer of ownership, when it wrongfully denies that the plaintiff is an owner, when it refuses to issue shares to one who is entitled to them, and when it fraudulently transfers ownership of the plaintiff's stock to someone else. One Texas case has also held that a corporation commits the tort of conversion when it improperly "alters the condition" of the stock by, in that case, imposing transfer restrictions on the stock. The court reasoned that the minority shareholder had a vested property right in the value of his shares and that imposing transfer restrictions on previously unrestricted stock sufficiently interfered with the plaintiff's property rights as to constitute the tort of conversion.

The recognition by Texas courts that a corporate act that does not affect the ownership of the shares but does violate the plaintiff's shareholder rights and diminish the value of the share to the plaintiff can constitute conversion provides an avenue to develop this cause of action to fill many of the gaps in the law left by the demise of the former shareholder oppression doctrine resulting from the Texas Supreme Court's decision in Ritchie v. Rupe. For example, extreme cases of stock dilution and other oppressive conduct would certainly alter the condition of the shares, diminish the value of the stock to the plaintiff, and be in denial of or inconsistent with the plaintiff's shareholder rights, and should be sufficient to establish a cause of action for the tort of conversion.

Demand and Refusal Elements in the Tort of Stock Conversion

The third and fourth elements of the tort of conversion are demand and refusal. These two elements are imposed when the defendant's possession of the plaintiff's property was initially acquired legally. The plaintiff takes his car to the repair shop, and the mechanic decides to keep it. The tort of conversion is complete when the plaintiff demands his car back and the mechanic refuses. The plaintiff would not be permitted to sue for conversion if he had not made a demand. The demand and refusal requirement is excused, however, if the conduct of the defendant constitutes a clear repudiation of the plaintiff's rights, “if it was apparent that the defendant would not reverse its conduct,” or if the facts otherwise establish that a demand would be futile.

The law deems the corporation always to be in possession of the stock; therefore, the corporation's possession is necessarily initially lawful. Moreover, the corporation is incapable of delivering possession of the stock to the plaintiff. Rather, in the tort of stock conversion, it is not the possession that is at issue but the corporation's violation of shareholder rights. Therefore, the demand and refusal concerns a demand that the corporation act consistently with the owner's rights, and the corporation refuses. Most commonly,
the fact situation is that the plaintiff acquires his shares in a transfer from another stockholder and then requests that the corporation register the transfer on the stock ledger and issue a new certificate in the plaintiff's name. When the corporation refuses, the tort of conversion is established. Interestingly, in almost every Texas opinion involving conversion of stock, the court has held that the demand requirement is excused because the corporation's conduct was clearly inconsistent with the plaintiff's rights.

Houston Business Lawyer Eric Fryar 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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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.

 

 

 

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