This particular case centers on a complex and somewhat abstract concept: did the “injury” that occurred happen to the corporation or the individual? The court needed to determine which one the action belonged to, because the rules are different for each.
A recent case heard by The Mississippi Supreme Court concerned an appeal that arose from a dispute regarding the distribution of shares of stock in three privately owned corporations. The dispute was between Carolyn Ware, and her son Richard Ware. The stock was being held by the estate of Carolyn’s husband and Richard’s father, Frankie Don Ware. The stock shares were to have been distributed to a testamentary trust, according to Frankie’s will.
Mississippi Supreme Court recently decided “In re Estate of Ware v. Ware.” The Presiding Judge, Michael K. Randolph, wrote in his opinion that the primary purpose of the trust was to provide the income and principal to Carolyn during her lifetime. Frankie’s will stated that upon Carolyn's death, Richard and his sisters were to receive only income benefits from the trust, and that his grandchildren were to receive the income and/or principal for their medical and educational needs.
Included in the assets available for distribution to the family trust were outstanding shares of stock equal to 25% of three closely held corporations. Carolyn also owned 25% of the shares of each corporation in her own name. Richard owned the remaining 50% of the shares in each of the corporations.
After Frankie's will was admitted to probate, Carolyn, as executrix, filed a petition to close the estate and to distribute the assets, according to Frankie's will. Richard filed an objection to the closing of the estate, asserting a section of each corporation's bylaws that required shares to be offered back to the corporations prior to any transfer. He argued that because Carolyn, as executrix, had not yet offered the shares to the corporations, the estate, as holder of the shares, couldn’t be closed until the corporate restrictions were satisfied. Carolyn argued that Richard lacked standing as an individual to object on behalf of the corporations. She also said the objection was an unreasonable restraint on the disposition of Frankie's will, and the restriction in the bylaws didn’t apply to testamentary dispositions.
The trial court then held that Carolyn was required to offer the shares to the corporation. Carolyn appealed.
Carolyn argued that Richard's objection to the closing of the estate is a shareholder derivative action, and, therefore, he lacked standing to object. Richard argues that his claim wasn’t a shareholder derivative claim, but rather, an objection to the administration of the estate. Richard argued that because he was named a trustee of the trust created by Frankie's will, he had standing to object to the closing of Frankie's estate.
The Court said that Richard's title of trustee alone was insufficient to confer standing, unless he was enforcing claims on behalf of the Family Trust or was defending claims against the family trust.
To address standing, the Court must determine whether Richard "had the right to participate in this cause of action," Judge Randolph wrote. Whether Richard's action is a shareholder derivative action will determine what law applies, and in turn, determine Richard's standing.
The Court said the focus is whether the corporation or the individual suffered injury, when deciding if the action belongs to the corporation or the individual. The Supreme Court held that Richard's objection to the closing of Frankie's estate was a shareholder derivative claim. He was seeking solely to enforce a putative corporate right. As a result, the law of shareholder derivative actions must apply. In Mississippi, a shareholder may not institute a derivative suit, unless certain statutory conditions are met. State caselaw requires that the corporation is party to the derivative action.
The Court reversed and remanded the trial court’s judgment, finding that Richard did not satisfy the statutory conditions required of shareholder derivative actions. The injury for which he sought relief pertained only to the corporations, and he did not have standing to sue on behalf of those three corporations.
Reference: Mississippi Supreme Court (March 1, 2018) “In re Estate of Ware v. Ware”