When a business exists in Texas with majority and minority shareholders, the minority shareholder can face oppression. In some cases, the minority shareholder may be able to file a claim for conversion, alleging that the minority shareholders are attempting to wrongly take ownership of the minority shareholder’s stake in the business.
This can be a tactic to squeeze out a minority shareholder in some circumstances. If a minority shareholder is going to file a conversion claim, she or he will need to be able to prove that she does have ownership in the business. How can a minority shareholder provide proof of business ownership under Texas law? We want to discuss a few options that exist for shareholders in a business.
If you have more questions or need assistance with your claim, you should reach out to a Texas business lawyer as soon as possible.
Evidence in the Form of a Stock Certificate/Share Ledger
One of the ways that a minority shareholder can provide proof of business ownership is through a valid stock certificate or share ledger. The Texas Comptroller of Public Accounts provides an example of a Stock Issuance/Transfer Ledger for businesses and shareholders to use in the state of Texas, which provides information about the name of the stockholder, the place of residence of the stockholder, detailed information about certificates issued (including the number of shares, the certificate numbers, and the dates issued), and the amount.
However, this is not often the best way for a minority shareholder to provide proof of business ownership because numerous businesses in the state of Texas simply do not issue stock certificates or keep clear records in a share ledger. To be sure, small businesses in particular may not have any of these records for a minority shareholder to use as evidence in a conversion claim.
And in some cases, even when there is a stock certificate, it may not provide clear and incontestable evidence of business ownership. Indeed, according to the Texas Supreme Court in the case of Yeaman v. Galveston City Co. (1916), “a certificate of stock in a corporation is not the stock itself, and is not necessary to a subscriber’s complete ownership of the stock, but is a mere muniment of title, evidencing the stockholder’s right of ownership.”
As such, while a stock certificate may provide some evidence of business ownership, it is not always the only evidence that a minority shareholder might need to succeed in a conversion claim. This does not mean, however, that it cannot provide some proof of business ownership. A minority shareholder may be able to use evidence of a stock certificate in conjunction with other evidence to prove business ownership in a conversion case.
When There Are No Stock Certificates and No Share Ledgers
If a business has not issued stock certificates and does not have a share ledger with a clear and complete record, what other evidence can a minority shareholder use to prove business ownership? Here is where the minority shareholder must seek evidence of an agreement between himself or herself and the majority shareholders.
In other words, there may be either an express or an implied contract between the parties that can serve as proof of business ownership. Generally speaking, in order to prove that an implied contract exists between the parties, the minority shareholder will need to prove the elements of a contract:
- Offer;
- Acceptance; and
- Consideration
When considering whether there was an offer, the minority shareholder will need to prove that the person making the offer to transfer stocks or other ownership in the business was serious, and that any statement from the majority shareholder regarding the intention to transfer stocks contained definite terms that were designed to elicit a response of acceptance from the minority shareholder.
When it comes to the second element of acceptance, the minority shareholder will need to prove that there was a “meeting of the minds” and that the parties agreed to the transfer of stock in exchange for the minority shareholder’s participation in the business.
In the Texas Court of Civil Appeals case of Greenspun v. Greenspun (1946), the court looks specifically at the issue of the transfer of title in stocks to an individual and says the following is necessary to prove the ownership of stock:
“As between transferor and transferee, it seems to be the rule that transfer of title may take place though there is no delivery of the certificates themselves, nor endorsement of them, nor transfer of them on the books of the corporation, and even though the sale be by parol.
In each case the inquiry is whether the minds of the transferor and transferee met, whether there was an intention that the stock should then and there by vested in the transferee, and whether there were acts in the nature of a symbolical delivery of the property.”
The court goes onto explain: “It is possible under some circumstances for one to own stock in a corporation though no certificate has been issued to him or endorsed or delivered to him, and likewise it is possible under some circumstances for title to the stock to pass without delivery of the certificate of stock or without written assignment of it.”
As such, if the majority shareholder can provide evidence of this “meeting of the minds,” and that the minority shareholder held up his or her end of the deal, then the court may determine that the minority shareholder did have a business interest in the company.
Other Evidence of Stock Ownership
What other evidence can a person use to prove ownership in a business? In some cases, she or he may be able to use a Schedule K-1 Form (Form 1065) filed with the Internal Revenue Service (IRS).
You should speak with a business law attorney about your best options for proving business ownership.
A Texas Corporate Law Attorney Can Assist You
Shareholder oppression is a serious issue, and you should know that minority shareholders have rights. There are many ways to prove business ownership, and an experienced Texas corporate law attorney can assist with your case. Contact Lindquist Wood Edwards LLP to learn more about the services we provide to minority shareholders in Texas.