Opinion issued March = 26, 2009=20
![](3D"http://www.1stcoa.courts.state.tx.us/opinions/070754f/seal.gif"=20)
In=20
appellate cause number 01-07-00754-CV, appellants, Raymond Somers, =
derivatively on behalf of EGL, Inc., and Vivian Golombuski and =
Platinum=20
PVA Fund, on behalf of themselves and all others similarly =
situated (the=20
"Class"), challenge the trial court's order dismissing their =
breach of=20
fiduciary duty claims against appellees, James R. Crane, Milton =
Carroll,=20
James C. Flagg, Frank J. Hevrdejs, Paul W. Hobby, Michael K. Jhin, =
Neil E.=20
Kelley, Sherman Wolff, Centerbridge Partners, L.P., the Woodbridge =
Co.,=20
Ltd., and Nominal Defendant EGL, Inc. In two=20
issues, Somers contends that the trial court erred in granting =
appellees'=20
motion to dismiss and special exceptions on the ground that =
Somers's=20
presuit demand "failed to comply with [article 5.14(C) of the =
Texas=20
Business Corporation Act]" In appellate cause =
number=20
01-08-00119-CV, appellant, Raymond Somers, derivatively on behalf =
of EGL,=20
Inc.,=20
challenges the trial court's order dismissing his breach of =
fiduciary duty=20
claims brought against appellees, James R. Crane, Milton Carroll, =
James C.=20
Flagg, Frank J. Hevrdejs, Paul W. Hobby, Michael K. Jhin, Neil E. =
Kelley,=20
Sherman Wolff, Centerbridge Partners, L.P., the Woodbridge Co., =
Ltd., and=20
Nominal Defendant EGL, Inc. based on appellees' pleas to the =
jurisdiction.=20
In a single issue, Somers contends that the trial court erred in =
granting=20
appellees' pleas to the jurisdiction on the ground that Somers =
lacked=20
standing to sue derivatively on EGL's behalf. We affirm=20
the orders of the trial court. In his=20
fourth amended petition in appellate cause number 01-07-00754-CV, =
Somers=20
alleges that Crane, who was EGL's Chairman, Chief Executive =
Officer, and=20
dominating shareholder, and Carroll, Flagg, Hevrdejs, Hobby, Jhin, =
Kelley,=20
and Sherman, who were EGL's Board of Directors, engaged in efforts =
to=20
"complete a management-led buyout of EGL" at an inadequate price =
as well=20
as efforts "to provide certain insiders and directors with =
preferential=20
treatment at the expense of . . . and unfair to [EGL's] public=20
shareholders." Somers asserts that a "Special Committee," which =
was=20
appointed by and made up of Board members who "were dominated and=20
controlled by Crane," "collectively engaged in a scheme to =
unfairly sell=20
the Company to Crane" for an undervalued price (the alleged "Crane =
Acquisition"). Somers=20
further alleged that on March 19, 2007, the Board announced to EGL =
shareholders that they had accepted an "unfairly low" bid of $38 =
per share=20
offered by the Buyout Group consisting of Crane, Centerbridge, and =
Woodbridge, but they "failed to tell shareholders" that a third =
party,=20
Apollo Management LP, had submitted a higher bid that the Special=20
Committee had refused to consider. Somers asserts that appellees =
breached=20
their fiduciary duties by initially refusing to consider this =
competing=20
offer and by subsequently agreeing to "lock up" the "Crane =
Acquisition=20
with [allegedly] onerous deal protection devices," such as a $30 =
million=20
termination fee, 51% of which was payable directly to Crane, if =
the Crane=20
Acquisition was not consummated. Somers complains that these and =
other=20
deal-protection devices made "it impossible for any bidder other =
than the=20
Buyout Group to buy [EGL] directly" and, because of the deal =
protection=20
devices, Apollo and other competing bidders were significantly=20
disadvantaged in the sales process. Somers=20
further alleges that Apollo, which remained interested in buying =
EGL,=20
brought suit against appellees and, upon learning of Apollo's =
lawsuit,=20
Somers, on April 11, 2007, filed a motion for temporary injunction =
and=20
appointment of receiver "aimed at securing an open sales process." =
Somers=20
agrees in his petition that Apollo had ultimately made the =
prevailing bid,=20
and, on May 24, 2007, EGL announced that it had entered into a =
merger=20
agreement with Apollo. However, Somers complains that EGL also =
announced=20
that it had paid the termination fee to the Buyout Group, a =
significant=20
portion of which went directly to Crane. Somers asserts =
claims=20
against appellees for breach of fiduciary duty and contends that =
appellees=20
Centerbridge and Woodbridge engaged in a conspiracy and aided and =
abetted=20
appellees' breach of fiduciary duty. Somers also asserts that =
appellees=20
engaged in self-dealing, "abuse of control," "gross =
mismanagement," and=20
"waste of corporate assets." Somers notes that he brought his suit =
derivatively, and he represents that he will "adequately and =
fairly"=20
represent the interests of EGL and its shareholders. Somers =
further=20
asserts that he owned EGL stock "during all relevant times" and he =
made=20
demands upon the Board on January 4, 2007, March 20, 2007, and =
April 4,=20
2007, pursuant to article 5.14(c) of the Texas Business =
Corporation Act,=20
but the=20
Board did not comply with his demands and EGL is being irreparably =
harmed. In his prayer, =
Somers=20
requests an order directing appellees to exercise their fiduciary =
duties=20
to obtain a transaction in EGL's best interest, rescinding the =
Crane=20
Acquisition or any terms thereof, and imposing a constructive =
trust upon=20
any benefits improperly received by appellees, including the =
termination=20
fee. The Class, in its=20
consolidated amended class action, makes allegations similar to =
those in=20
Somers's petition, but the Class sues appellees directly rather =
than=20
derivatively. Like the claims asserted by Somers, the Class =
asserts claims=20
for breach of fiduciary duties and aiding and abetting breach of =
fiduciary=20
duties against appellees In response=20
to the arguments made by appellees in appellate cause number=20
01-07-00754-CV that he had not provided proper pre-suit notice, =
Somers=20
made another pre-suit demand in June 2007, waited 90 days, and =
then filed=20
his second derivative suit, appellate cause number 01-08-00119-CV, =
on=20
September 18, 2007, after the EGL merger had been consummated and =
after he=20
had lost his shareholder status. The Class was not a party to this =
second=20
suit. Somers's factual allegations in this second suit largely =
mirror=20
those contained in his petition in the first suit. Additionally, =
Somers=20
alleges that, on July 31, 2007, EGL held a meeting where =
shareholders were=20
asked to approve the merger with Apollo, a majority of the shares=20
represented voted in favor of the merger, and Apollo's acquisition =
of EGL=20
was consummated on August 2, 2007. Somers=20
reasserts the same claims against the individual appellees for =
breach of=20
fiduciary duty, "self-dealing," "abuse of control," "gross =
mismanagement,"=20
and "waste of corporate assets." Against appellees Centerbridge =
and=20
Woodbridge, Somers asserts claims for conspiracy and aiding and =
abetting=20
breach of fiduciary duty. Somers also similarly asserts that he =
would=20
"adequately and fairly" represent the interests of EGL and its=20
shareholders in this second suit, and he asserts that he owned EGL =
stock=20
"during all relevant times." Somers further states that, pursuant =
to=20
article 5.14(c), he made demand upon the Board on June 12, 2007 =
"to=20
immediately take steps to ensure that [EGL] was compensated for =
the=20
Board's breaches of fiduciary duty, either by voluntarily repaying =
the $30=20
million in damages caused to [EGL] when the termination fee was =
paid, or=20
by commencing a legal proceeding on behalf of the Company against =
each EGL=20
Board member for their breaches of fiduciary duty." Somers states =
that he=20
"did not receive a substantive response to his demand prior to the =
expiration of 90 days from the date his demand was made, or by =
September=20
10, 2007." In his=20
prayer, Somers requests an order declaring that, by agreeing to =
the Crane=20
Acquisition, appellees breached their fiduciary duties as well as =
an order=20
rescinding the payment of the termination fee to the Buyout Group =
and=20
awarding damages to EGL and its former shareholders.=20
"We review=20
a trial court's dismissal of a case upon special exceptions for =
failure to=20
state a cause of action as an issue of law, using a de novo =
standard of=20
review." Alpert v. Crain, Caton, & James, P.C., 178 =
S.W.3d=20
398, 405 (Tex. App.--Houston [1st Dist.] 2005, pet. denied);=20
Shirvanian v. DeFrates, 161 S.W.3d 102, 105 (Tex. =
App.--Houston=20
[14th Dist.] 2004, pet. denied). We accept as true all of the =
plaintiff's=20
material factual allegations and all reasonable inferences from =
those=20
allegations. DeFrates, 161 S.W.3d at 105. We also=20
review de novo a trial court's ruling on a plea to the =
jurisdiction, which=20
is a dilatory plea that seeks dismissal of a case for lack of =
subject=20
matter jurisdiction, because subject matter jurisdiction is a =
question of=20
law. Harris County v. Sykes, 136 S.W.3d 635, 638 =
(Tex.=20
2004); Texas Nat. Res. Conservation Comm'n v. IT-Davy, 74 =
S.W.3d=20
849, 855 (Tex. 2002). In reviewing the trial court's ruling on a =
plea to=20
the jurisdiction, we construe the pleadings liberally in favor of =
the=20
plaintiff and determine if the plaintiff is alleging facts that=20
affirmatively demonstrate the court's jurisdiction to hear the =
cause.=20
Villarreal v. Harris County, 226 S.W.3d 537, 541 (Tex.=20
App.--Houston [1st Dist.] 2006, no pet.). We may also consider =
evidence=20
necessary to resolve the jurisdictional issues raised. County =
of=20
Cameron v. Brown, 80 S.W.3d 549, 555 (Tex. 2002). If the =
pleadings=20
affirmatively negate the existence of jurisdiction, then the trial =
court=20
may grant a plea to the jurisdiction without providing the =
plaintiff an=20
opportunity to amend. Tex. Dep't of Parks & Wild. v. =
Miranda,=20
133 S.W.3d 217, 227 (Tex. 2004). In=20
appellate cause number 01-07-00754-CV, in its first issue, the =
Class=20
argues that the trial court erred in granting appellees' motion to =
dismiss=20
because "[i]n a cash-out merger where the corporation will no =
longer exist=20
in its pre-merger form and the shareholders will be dispossessed =
of any=20
interest in the corporation after the merger, . . . the directors =
of a=20
Texas corporation owe [a] fiduciary duty directly to the =
shareholders of a=20
corporation." Appellees argue that the trial court properly =
granted their=20
special exceptions and dismissed the shareholder class action =
because the=20
Class has "no direct right of action against [appellees] for =
alleged=20
breach of fiduciary duty." "A=20
director's fiduciary duty runs only to the corporation, not to =
individual=20
shareholders or even to a majority of the shareholders." =
Hoggett v.=20
Brown, 971 S.W.2d 472, 488 (Tex. App.--Houston [14th Dist.] =
1997,=20
pet. denied) (citing Gearhart Indus., Inc. v. Smith Int'l =
Inc.,=20
741 F.2d 707, 721 (5th Cir. 1984) and Schautteet v. Chester =
State=20
Bank, 707 F. Supp. 885, 888 (E.D. Tex. 1988)); see also =
In re=20
Webber, 350 B.R. 344, 364 (S.D. Tex. 2006) ("With respect to =
a formal=20
fiduciary relationship, a corporate officer's fiduciary duty =
generally=20
runs only to the corporation and not to individual =
shareholders.");=20
Scherrer v. Haynes and Boone, L.L.P., No. 01-99-01164-CV, =
2002 WL=20
188825 (Tex. App.--Houston [1st Dist.] Feb. 7, 2002, no pet.) =
(opinion not=20
designated for publication) ("A corporate director's fiduciary =
duty runs=20
only to the corporation, not to individual shareholders."); =
Aitlqaid=20
v. Soussan, No. 01-98-01017-CV, 2001 WL 301430 (Tex. =
App.--Houston=20
[1st Dist.] Mar. 29, 2001, no pet.) (opinion not designated for=20
publication) (same); A. Copeland Enters., Inc. v. Guste, =
706 F.=20
Supp. 1283, 1288 (W.D. Tex. 1989) ("Claims concerning breach of a=20
corporate director's fiduciary duties can only be brought by a =
shareholder=20
in a derivative suit because a director's duties run to the =
corporation,=20
not to the shareholder in his own right."). "[T]he right =
to=20
proceed against an officer or former officer of a corporation for=20
breaching a fiduciary duty owed to the corporation belongs to the=20
corporation itself." Grinnell v. Munson, 137 S.W.3d 706, =
718=20
(Tex. App.--San Antonio 2004, no pet.). "While corporate officers =
owe=20
fiduciary duties to the corporation they serve, they do not =
generally owe=20
fiduciary duties to individual shareholders unless a contract =
or=20
confidential relationship exists between them in addition to the =
corporate=20
relationship." Cotten v. Weatherford Bancshares, =
Inc., 187=20
S.W.3d 687, 698 (Tex. App.--Fort Worth 2006, pet. denied) =
(emphasis=20
added); see also Grinnell, 137 S.W.3d at 718. Due to the=20
"extraordinary nature" of a fiduciary relationship, the law does =
not=20
recognize such a relationship lightly. Cotten, 187 S.W.3d =
at 698.=20
Here, the=20
Class does not allege that it had a separate contract with =
appellees nor=20
that it had a special or confidential relationship of the kind =
previously=20
recognized by Texas courts sufficient to create a fiduciary duty. =
See=20
Hoggett, 971 S.W.2d at 488 n.13 (stating that "in certain =
limited=20
circumstances, a majority shareholder who dominates control over =
the=20
business may owe such a duty to the minority shareholder"). The =
Class's=20
relationship with appellees was solely a corporate relationship.=20
We=20
overrule the Class's first issue. Denial=20
of Motion for New Trial In its=20
second issue, the Class contends that the trial court erred in =
denying its=20
new trial motion so that it could plead new causes of action based =
upon=20
"false and misleading statements" in a proxy that solicited the=20
shareholders' votes in favor of the merger. Appellees argue that =
the trial=20
court did not abuse its discretion in denying the Class's motion =
for leave=20
to amend because the Class "sought to amend their [sic] petition =
to assert=20
a new claim that could not have been brought until after the trial =
court=20
dismissed their petition because it was based on subsequent=20
events." In support=20
of its argument that the trial court abused its discretion in =
denying its=20
new trial motion and request to amend its pleadings, the Class =
cites,=20
among other cases, Weidner v. Sanchez, 14 S.W.3d 353, 376 =
(Tex.=20
App.--Houston [14th Dist.] 2000, no pet.). In Weidner, =
the court=20
stated that "[a] trial court has no discretion to refuse a =
post-verdict=20
amendment of pleadings unless the opposing party presents evidence =
of=20
surprise or prejudice, or the amendment asserts a new cause of =
action=20
or defense and the opposing party objects to the amendment."=20
Id. (emphasis added). Here, the trial court signed its =
order=20
granting appellees' motions to dismiss and special exceptions on =
June 8,=20
2007. In its motion for reconsideration and new trial and motion =
for leave=20
to amend, the Class asserted that, on June 26, 2007, two weeks =
after the=20
trial court dismissed its suit, EGL filed a proxy statement that =
was=20
"materially false and misleading." The Class sought to amend its =
petition=20
to add "direct" claims related to these proxy statements. =
Appellees filed=20
a response to this motion, objecting to the Class's efforts to =
amend its=20
petition and add these claims. Because the Class sought to add new =
claims=20
arising out of a proxy statement that issued after the trial court =
had=20
dismissed the Class's original breach of fiduciary duty claims, =
and=20
because appellees objected to the Class's efforts to add these new =
causes=20
of action after the trial court had already dismissed the original =
case,=20
we hold that the trial court did not abuse its discretion in =
denying the=20
Class's motion for reconsideration and new trial and motion for =
leave to=20
amend seeking to add these new claims. We overrule=20
the Class's second issue. In=20
appellate cause number 01-08-00119-CV, in a single issue, Somers =
contends=20
that the trial court erred in granting appellees' pleas to the=20
jurisdiction on the ground that Somers lacked standing to sue =
derivatively=20
on EGL's behalf. Somers asserts that "[u]nder the plain meaning of =
the=20
Texas Business Corporation Act, he has standing to prosecute the=20
derivative action" and"[a]ny other conclusion would make Texas the =
only=20
jurisdiction in which shareholders have absolutely no mechanism to =
secure=20
a remedy for corporate misconduct in the context of a merger =
transaction."=20
Appellees respond that "[i]t is well established under Texas law =
that a=20
shareholder must own stock at the time of filing a derivative suit =
and=20
continuously through the completion of the suit to have derivative =
standing," and, since it was undisputed that Somers was not a =
shareholder=20
at the time he filed suit, the trial court properly granted their =
pleas to=20
the jurisdiction. Article=20
5.14(B) of the Texas Business Corporation Act, entitled =
"Derivative=20
Proceedings," provides, B.=20
Standing. A =
shareholder may not commence or maintain a derivative proceeding =
unless=20
the shareholder: (1) was a=20
shareholder of the corporation at the time of the act or omission=20
complained of or became a shareholder by operation of law from a =
person=20
that was a shareholder at that time; and (2) fairly=20
and adequately represents the interests of the corporation in =
enforcing=20
the right of the corporation. Tex. Bus.=20
Corp. Act Ann. art. 5.14(B) (Vernon 2003). Shareholder is defined =
in the=20
Business Corporation Act to mean "the person in whose name shares =
issued=20
by a corporation are registered at the relevant time in the share =
transfer=20
records maintained by the corporation pursuant to Article 2.44 of =
this=20
Act." Id. art. 1.02(A)(22) (Vernon Supp. 2008). We start with the =
plain=20
meaning of the controlling statute, article 5.14. Although the =
parties=20
present opposing constructions of the plain meaning of this =
article, we=20
conclude that article 5.14(B) states, in no uncertain terms, that =
"[a]=20
shareholder may not commence or maintain a derivative =
proceeding=20
unless the shareholder . . . ." meets certain =
requirements. Tex.=20
Bus. Corp. Act Ann. art. 5.14(B) Our holding=20
is consistent with the only Texas case to squarely address =
derivative=20
standing under article 5.14(B), albeit a predecessor version that =
has=20
since been amended. See Zauber v. Murray Sav. Ass'n, 591 =
S.W.2d=20
932, 935 (Tex. Civ. App.--Dallas 1979), writ ref'd per curiam, 601 =
S.W.2d=20
940 (Tex. 1980). The court in Zauber considered a former =
version=20
of article 5.14(B), which provided that "[a] derivative suit may =
be=20
brought in this State only if: (1) The plaintiff was a record or=20
beneficial owner of shares . . . at the time of the transaction of =
which=20
he complains . . . ." Id. at 936 (citing former Tex. Bus. =
Corp.=20
Act Ann. art. 5.14(B)). In applying this article, the Zauber=20
court explained, The=20
requirement in article 5.14(B) that in order to bring a derivative =
suit a=20
plaintiff must have been a shareholder at the time of the wrongful =
transaction, is only a minimum requirement. The federal =
rule=20
governing derivative suits, which contains similar requirements to =
article=20
5.14(B), has been construed to include a further requirement =
that=20
shareholder status be maintained throughout the suit. The =
reasoning=20
behind allowing a shareholder to maintain a suit in the name of =
the=20
corporation when those in control wrongfully refuse to maintain it =
is that=20
a shareholder has a proprietary interest in the =
corporation.=20
Therefore, when a shareholder sues, he is protecting his own =
interests as=20
well as those of the corporation. If a shareholder voluntarily =
disposes of=20
his shares after instituting a derivative action, he necessarily =
destroys=20
the technical foundation of his right to maintain the action. If, =
on the=20
other hand, a shareholder's status is involuntarily destroyed, a =
court of=20
equity must determine whether the status was destroyed without a =
valid=20
business purpose; for example, was the action taken merely to =
defeat the=20
plaintiff's standing to maintain the suit? Somers seeks to =
distinguish=20
Zauber by noting that the Legislature amended former =
article=20
5.14(B) in 2003 to provide that "[a] shareholder may not =
commence or=20
maintain a derivative proceeding unless the shareholder: (1) =
was a=20
shareholder of the corporation at the time of the act or omission=20
complained of . . . ." Tex. Bus. Corp. Act Ann. art. 5.14(B) =
(emphasis=20
noted by Somers). But the implied requirement recognized by the =
Zauber=20
court that a shareholder must remain a shareholder and retain =
his=20
shareholder status to maintain a derivative suit did not expressly =
appear=20
in former article 5.14(B), and nothing in the amended version of =
article=20
5.14(B) conflicts with Zauber either. See =
Zauber, 591=20
S.W.2d at 937 (stating that requirement in article 5.14(B) was =
"only a=20
minimum requirement"). Somers also=20
argues that article 5.03(M) of the Texas Business Corporation Act =
supports=20
his contention that he has standing to commence and maintain the=20
derivative suit even though it is undisputed that he was not a =
shareholder=20
at the time he filed suit. However, we agree with appellees that =
nothing=20
in article 5.03(M) confers standing. Rather, article 5.03(M) =
merely states=20
that " We overrule=20
Somers's sole issue in appellate cause number=20
01-08-00119-CV. In=20
appellate cause number 01-07-00754-CV, we affirm the trial court's =
orders=20
dismissing the Class's claims against appellees and denying the =
Class's=20
new trial motion. In appellate cause number 01-08-00119-CV, we =
affirm the=20
order of the trial court dismissing Somers's claims against =
appellees=20
because Somers, as a former shareholder, lacks derivative =
standing. We=20
similarly hold, in appellate cause number 01-07-00754-CV, that =
even if the=20
trial court erred in granting appellees' motion to dismiss and =
special=20
exceptions
Terry=20
Jennings Panel=20
consists of Justices Jennings, Hanks, and Bland. 1. 2. 3. 4. 5.