Haynes and Boone Secures Victory Involving Shareholder Derivative Suits

Tuesday, June 30, 2009 - 01:00

The Texas Supreme Court has issued a decision in favor of Lancer Corporation directors, represented by Haynes and Boone, LLP, in a precedent-setting ruling on shareholder derivative suits involving Texas corporations. The decision marks the first ruling by the Texas Supreme Court on the strict statutory prerequisites for commencing shareholder derivative litigation and represents a significant victory for businesses that elect to incorporate under the laws of Texas.

In a unanimous decision, the court ruled that a two-sentence pre-suit demand letter to Lancer directors was inadequate under article 5.14(c) of the Texas Business Corporations Act because it referenced no complaining shareholder, cited no specific wrongdoing by any party, described no specific injury to the corporation and failed to request any specific remedial action be taken by the Lancer board.

Texas corporate law makes a pre-suit demand an absolute prerequisite to the commencement of a shareholder derivative suit. The court's ruling held that in issuing a pre-suit demand letter, a shareholder must be identified and the content of the demand letter must be particular. The court also held that mandamus review of a challenged pre-suit demand letter was appropriate, stating that "allowing this case to proceed to trial would effectively allow a shareholder to sue for damages connected with a merger without giving the corporation's board an opportunity to make such a decision for itself."

Litigation partner Nicholas Even represented Lancer's directors, and appellate partner Debbie McComas argued the matter before the Texas Supreme Court. In addition to Mr. Even and Ms. McComas, the client team representing Lancer Corporation included partners George Bramblett and Lamont Jefferson.