The Fifth Court held in Rudnicki v. Thompson Petroleum Corp. that a former oil-company executive was not entitled to indemnity for certain litigation expenses, agreeing with the company’s position that: ““[Partnership’s] Agreement could have provided for indemnification of expenses incurred ‘based on,’ ‘arisin(g from,’ or similarly ‘related to’ a covered person’s performance of the obligations of the GP with respect to [the Partnership]. But that simply is not what it says.” The company was authorized to indemnify the executive, but was not required to do so. No. 05-23-00125-CV (March 20, 2024) (mem. op.).

A shareholder’s record request led to Third Eye, Inc. v. UST Global, Inc., which affirmed a judgment requiring compliance with the request. On the question whether the shareholder had an “improper purpose” for the request, the Fifth Court reminded that the “mere fact that stockholders seeking access to a company’s books and records are on unfriendly terms with the company is not a ground for denying mandamus relief,” and concluded:

“Given (1) UST’s undisputed evidence that Third Eye never provided it with the financial information it was contractually obligated to deliver, (2) UST’s stated concern regarding its investment in Third Eye, and (3) Third Eye’s own evidence that it began losing substantial business beginning in 2017, we conclude the evidence was factually sufficient to support the trial court’s conclusion that UST had a proper purpose in requesting to inspect Third Eye’s books and records.”

No. 05-22-00334-CV (May 3, 2023) (mem. op.).

Delaware corporate law has a robust line of authority about the advancement of attorneys’ fees during litigation; Texas, not so much, which is why In re Demattia is important to know. The case involved a typical advancement provision in an LLC’s organizational documents:

“(a) the Company shall indemnify each Member who was, is, or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (‘Proceeding’), any appeal thereof, or any inquiry or investigation preliminary thereto, by reason of the fact that he or she is or was a Member ….”

in the context of the LLC’s suit against a former member for the alleged theft of trade secrets. Even in that setting where the member was adverse to the company, the Fifth Court held that the provision was enforceable, drawing on the principles established in Delaware law:

The board may well have a firm basis to believe that the official intentionally injured the corporation and is therefore reluctant to advance funds for his defense, fearing that the funds will never be paid back and resisting the idea of seeing further depletion of corporate resources at the instance of someone perceived to be a faithless fiduciary. But the Delaware courts have determined that to ‘give effect to this natural human reaction as public policy would be unwise’ because the possibility exists that the company’s allegations are untrue or cannot be proven.

Based on that conclusion, the Court granted mandamus relief as against a summary-judgment ruling adverse to the member on the issue of his entitlement to fee advancement. Notably, because of the limited scope of the order under review, the opinion addressed only the entitlement to fees, and not the specific procedural mechanism under Texas law for obtaining payment. No. 05-21-00460-CV (April 12, 2022).

Pennington, Fields, and Phillips each owned 1/3 of the shares of Advantage Marketing & Labeling, Inc. Pennington argued that under their shareholder agreement he other two were required to buy his stock when he decided to sell his full interest and become a “retiring shareholder” under that agreement. Fields and Phillips resisted, pointing out that Pennington was employed by another business when he made his demand; thus, “because he was not ‘retired’ from any and all employment, he could not be a ‘retiring shareholder’ for purposes of the CPA.” The Fifth Court disagreed based on two basic contract-construction principles: “This construction . . . assigns a definition to only one of the two words the parties used to describe who must comply with the paragraph’s provisions. It also disregards the context. The paragraph imposes requirements for the disposition of shares by a ‘retiring shareholder’ in the context of an agreement that imposes restrictions on stock transfer.” Pennington v. Fields, No. 05-19-00149-CV (May 22, 2020) (mem. op.)

Section 21.563(c)(1) of the Business Organizations Code says: “If justice requires . . . 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 the shareholder’s own benefit.” Cooke v. Karlseng reminds that this statute serves a specific purpose–a reminder with important consequences for standing and limitations issues: “Section 21.563 does not turn a derivative claim into an individual claim. This Court has concluded that although the statute permits a court to ‘treat a derivative action as a direct action by a shareholder, the claims remain vested in the corporation.’ Rather than transforming the nature of the plaintiff’s claim, the statute permits the trial court to award damages in a derivative proceeding directly to the shareholder ‘if necessary to protect the interests of creditors or other shareholders of the corporation.'” No. 05-18-00206-CV (Aug. 14, 2019) (mem. op.).

After a detour to Austin on an important but infrequent procedural issue, the Fifth Court turned to the merits of Pak v. Ad Villarai LLC; holding as follows on the issue of whether Pak was properly removed from his management positions:

The evidence showed written notice was given three days after the action removing Pak as member and co-manager. The notice was given to both Pak and Harrison. Both had full knowledge, yet the testimony at trial showed neither objected. In his reply brief, Pak complains the consent was taken while the two sides were in litigation against each other, so there “was no way the Trial Court should have reasoned Chan Pak would have consented from being removed” from Villas-Manager by appellees. Pak does not provide any legal authority to support his position, nor can we agree that (1) the statute does not apply if the parties are in litigation or (2) the trial court was required to guess at Pak’s reasons for failing to object. Nothing on the face of the statute requires either. Under section 101.359 of the business organizations code, Pak and Harrison’s consent to Pak’s removal as co-manager was established by their failure to object.

No. 05-14-01312-CV (May 5, 2018) (mem. op.)

In 2005, Dibon Solutions acquired 100% of RTS’s common stock. In 2006, the Texas Secretary of State ordered the forfeiture of RTS’s charter or certificate of authority for failure to comply with the tax code. In 2007, Martinair contracted with RTS for use of RTS’s profit optimization products and related services. Martinair later terminated its agreement with RTS, and RTS sued Martinair for breach of contract, identifying the plaintiff as RTS, “a corporation organized under the laws of the State of Texas.”

Martinair filed a motion for summary judgment against RTS, arguing RTS’s forfeiture of its corporate existence in 2006 deprived it of legal authority and capacity under Texas law to enter into the Agreement upon which it sued Martinair, which the trial court granted in part. The trial court also struck RTS’s amended petition, which had purported to substitute RTS’s parent corporation, Dibon, as the plaintiff. On appeal, Dibon argued the trial court erred in striking its amended petition. The Court of Appeals disagreed, and affirmed the trial court’s ruling. Rule 28 permits a partnership doing business under an assumed name to file suit in that name. However, Dibon failed to make a showing that it actually conducted business under the name RTS, thus its amended petition was improper.

Dibon Solutions, Inc. v. Martinair Holland N.V., No. 05-11-01586-CV