Texas Business Corporation Act - Article 5.14. Derivative Proceedings
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Art. 5.14. Derivative Proceedings
A. Certain Definitions. For purposes of this Article:
(1) "Derivative proceeding" means a civil suit in the right of a
domestic corporation or, to the extent provided in Section K of this
Article, in the right of a foreign corporation.
(2) "Shareholder" includes a beneficial owner whose shares are held
in a voting trust or by a nominee on the beneficial owner's behalf.
B. Standing. A shareholder may not commence or maintain a
derivative proceeding unless the shareholder:
(1) was a shareholder of the corporation at the time of the act or
omission complained of or became a shareholder by operation of law
from a person that was a shareholder at that time; and
(2) fairly and adequately represents the interests of the
corporation in enforcing the right of the corporation.
C. Demand. No shareholder may commence a derivative proceeding
until:
(1) a written demand is filed with the corporation setting forth
with particularity the act, omission, or other matter that is the
subject of the claim or challenge and requesting that the
corporation take suitable action; and
(2) 90 days have expired from the date the demand was made, unless
the shareholder has earlier been notified that the demand has been
rejected by the corporation or unless irreparable injury to the
corporation is being suffered or would result by waiting for the
expiration of the 90-day period.
D. Stay; Discovery. (1) If the domestic or foreign corporation
commences an inquiry into the allegations made in a demand or
petition and the person or group described in Section H of this
Article is conducting an active review of the allegations in good
faith, the court shall stay a derivative proceeding until the
review is completed and a determination is made by the person or
group as to what further action, if any, should be taken. To obtain
a stay, the domestic or foreign corporation must provide the court
with a written statement containing an undertaking to advise the
court and the shareholder making the demand of the determination
promptly on the completion of the review of the matter. A stay
shall, on motion, be reviewed as to its continued necessity every 60
days thereafter. If the review and determination by the person or
group described in Section H of this Article is not completed within
60 days, the stay may be renewed for one or more additional 60-day
periods on the domestic or foreign corporation providing the court
and the shareholder making the demand with a written statement of
the status of the review and the reasons a continued extension of
the stay is necessary.
(2) If a domestic or foreign corporation proposes to dismiss a
derivative proceeding pursuant to Section F of this Article,
discovery by a shareholder following the filing of the derivative
proceeding in accordance with the provisions of this Article shall
be limited to facts relating to whether the person or group
described in Section H of this Article is independent and
disinterested, the good faith of the inquiry and review by such
person or group, and the reasonableness of the procedures followed
by such person or group in conducting its review and will not extend
to any facts or substantive matters with respect to the act,
omission, or other matter that is the subject matter of the action
in the derivative proceeding. The scope of discovery may be
expanded if the court determines after notice and hearing that a
good faith review of the allegations for purposes of Section F of
this Article has not been made by an independent and disinterested
person or group in accordance with Section F of this Article.
E. Tolling of the Statute of Limitations. A written demand filed
with the corporation under Section C of this Article tolls the
statute of limitations on the claim on which demand is made until
the earlier of (1) 90 days or (2) 30 days after the corporation
advises the shareholder that the demand has been rejected or the
review has been completed.
F. Dismissal of Derivative Proceeding. A court shall dismiss a
derivative proceeding on a motion by the corporation if the person
or group described in Section H of this Article determines in good
faith, after conducting a reasonable inquiry and based on the
factors as the person or group deems appropriate under the
circumstances, that the continuation of the derivative proceeding
is not in the best interests of the corporation. In determining
whether the requirements of the previous sentence have been met,
the burden of proof shall be on:
(1) the plaintiff shareholder, if a majority of the board of
directors consists of independent and disinterested directors at
the time the determination is made or if the determination is made
by a panel of one or more independent and disinterested persons
appointed under Section H(3) of this Article; or
(2) the corporation, in all other circumstances; provided that if
the corporation presents prima facie evidence that demonstrates
that the directors appointed pursuant to Section H(2) of this
Article are independent and disinterested, the burden of proof is
on the plaintiff shareholder.
G. Commencement of Proceeding After Rejection of Demand. If a
derivative proceeding is commenced after a demand is rejected, the
petition must allege with particularity facts that establish that
the rejection was not made in accordance with the requirements of
Sections F and H of this Article.
H. Determination by Directors or Independent Persons. The
determination described in Section F of this Article must be made
by:
(1) a majority vote of independent and disinterested directors
present at a meeting of the board of directors at which interested
directors are not present (at the time of the vote) if the
independent and disinterested directors constitute a quorum of the
board of directors;
(2) a majority vote of a committee consisting of two or more
independent and disinterested directors appointed by a majority
vote of one or more independent and disinterested directors present
at a meeting of the board of directors, whether or not the
independent and disinterested directors so acting constitute a
quorum of the board of directors; or
(3) a panel of one or more independent and disinterested persons
appointed by the court on a motion by the corporation setting forth
the names of the persons to be so appointed together with a
statement that to the best of its knowledge the persons so proposed
are disinterested persons and qualified to make the determinations
contemplated by Section F of this Article. Such panel shall be
appointed if the court finds that such persons are independent and
disinterested persons and are otherwise qualified in regard to
expertise, experience, independent judgment, and other factors
deemed appropriate by the court under the circumstances to make
such determinations. Persons appointed by the court shall have no
liability to the corporation or its shareholders for any action or
omission taken by them in that capacity, absent fraud or wilful
misconduct.
I. Discontinuance or Settlement. A derivative proceeding may not be
discontinued or settled without the approval of the court. If the
court determines that a proposed discontinuance or settlement may
substantially affect the interest of other shareholders, it shall
direct that notice be given to the affected shareholders.
J. Payment of Expenses. (1) On termination of a derivative
proceeding, the court may order:
(a) the domestic or foreign corporation to pay the expenses of the
plaintiff incurred in the proceeding if it finds that the
proceeding has resulted in a substantial benefit to the domestic or
foreign corporation;
(b) the plaintiff to pay the expenses of the domestic or foreign
corporation or any defendant incurred in investigating and
defending the proceeding if it finds that the proceeding was
commenced or maintained without reasonable cause or for an improper
purpose; or
(c) a party to pay the expenses incurred by another party (including
the domestic or foreign corporation) because of the filing of a
pleading, motion, or other paper, if it finds that the pleading,
motion, or other paper (i) was not well grounded in fact after
reasonable inquiry, (ii) was not warranted by existing law or a good
faith argument for the extension, modification, or reversal of
existing law, or (iii) was interposed for an improper purpose, such
as to harass or to cause unnecessary delay or needless increase in
the cost of litigation.
(2) For purposes of this section, "expenses" mean reasonable
expenses incurred in the defense of a derivative proceeding,
including without limitation:
(a) attorney's fees;
(b) costs in pursuing an investigation of the matter that was the
subject of the derivative proceeding; and
(c) expenses for which the domestic or foreign corporation or a
corporate defendant may be required to indemnify another person.
K. Application to Foreign Corporations. In any derivative
proceeding brought in the right of a foreign corporation, the
matters covered by this Article are governed by the laws of the
jurisdiction of incorporation of the foreign corporation, except
for Sections D, I, and J of this Article, which are procedural and
not matters relating to the internal affairs of the foreign
corporation. In the case of matters relating to a foreign
corporation under Section D of this Article, references to a person
or group described in Section H of this Article are to be deemed to
refer to a person or group entitled under the laws of the
jurisdiction of incorporation of the foreign corporation to review
and dispose of a derivative proceeding, and the standard of review
of a decision by the person or group to dismiss the derivative
proceeding is to be governed by the laws of the jurisdiction of
incorporation of the foreign corporation.
L. Closely Held Corporations. (1) The provisions of Sections B
through H of this Article are not applicable to a closely held
corporation. If justice requires:
(a) a derivative proceeding brought by a shareholder of a closely
held corporation may be treated by a court as a direct action
brought by the shareholder for his own benefit; and
(b) a recovery in a direct or derivative proceeding by a shareholder
may be paid either directly to the plaintiff or to the corporation
if necessary to protect the interests of creditors or other
shareholders of the corporation.
(2) For purposes of this section, a "closely held corporation"
means a corporation:
(a) with less than 35 shareholders; and
(b) that has no shares listed on a national securities exchange or
regularly quoted in an over-the-counter market by one or more
members of a national securities association.
Added by Acts 1965, 59th Leg., p. 698, ch. 332, Sec. 1. Amended by
Acts 1973, 63rd Leg., p. 1508, ch. 545, Sec. 37, eff. Aug. 27, 1973;
Acts 1997, 75th Leg., ch. 375, Sec. 30, eff. Sept. 1, 1997.
Article: 5.06 5.08 5.09 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 5.18 5.19 5.20 6.01
Last modified: August 11, 2007
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