Opinion

Opinion issued March 26, 2009

In The

Court of Appeals

For The

First District of Texas

NO. 01-07-00754-CV

__________

RAYMOND SOMERS, DERIVATIVELY ON BEHALF OF EGL, INC., AND

VIVIAN GOLOMBUSKI AND PLATINUM PVA FUND, ON BEHALF OF

THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, AND

PLATINUM PVA FUND, Appellants

V.

JAMES R. CRANE, MILTON CARROLL, JAMES C. FLAGG, FRANK J.

HEVRDEJS, PAUL W. HOBBY, MICHAEL K. JHIN, NEIL E. KELLEY,

SHERMAN WOLFF, CENTERBRIDGE PARTNERS, L.P., THE

WOODBRIDGE CO. LTD. AND NOMINAL DEFENDANT EGL, INC.,

Appellees

On Appeal from the 125th District Court

Harris County, Texas

Trial Court Cause No. 2007-00139

NO. 01-08-00119-CV

__________

RAYMOND SOMERS, DERIVATIVELY ON BEHALF OF EGL, INC.,

Appellant

V.

JAMES R. CRANE, MILTON CARROLL, JAMES C. FLAGG, FRANK J.

HEVRDEJS, PAUL W. HOBBY, MICHAEL K. JHIN, NEIL E. KELLEY,

SHERMAN WOLFF, CENTERBRIDGE PARTNERS, L.P., THE

WOODBRIDGE CO. LTD. AND NOMINAL DEFENDANT EGL, INC.,

Appellees

On Appeal from the 125th District Court

Harris County, Texas

Trial Court Cause No. 2007-56930

O P I N I O N

In appellate cause number 01-07-00754-CV, appellants, Raymond Somers,

derivatively on behalf of EGL, Inc., and Vivian Golombuski and Platinum PVA Fund,

on behalf of themselves and all others similarly situated (the "Class"), challenge the

trial court's order dismissing their breach of fiduciary duty claims against appellees,

James R. Crane, Milton Carroll, James C. Flagg, Frank J. Hevrdejs, Paul W. Hobby,

Michael K. Jhin, Neil E. Kelley, Sherman Wolff, Centerbridge Partners, L.P., the

Woodbridge Co., Ltd., and Nominal Defendant EGL, Inc.

In two issues, Somers contends that the trial court erred in granting appellees'

motion to dismiss and special exceptions on the ground that Somers's presuit demand

"failed to comply with [article 5.14(C) of the Texas Business Corporation Act]" (1) and

that the trial court "abuse[d] its discretion by denying Somers's motion for leave to

amend and request for findings of fact and conclusions of law." In its first issue, the

Class contends that the trial court erred in granting appellees' motion to dismiss

because "[i]n a cash-out merger where the corporation will no longer exist in its pre-merger form and the shareholders will be dispossessed of any interest in the

corporation after the merger, . . . the directors of a Texas corporation owe [a]

fiduciary duty directly to the shareholders of a corporation." In its second issue, the

Class contends that the trial court erred in denying its new trial motion so that it could

plead new causes of action based upon "false and misleading statements" in a proxy

that solicited their votes in favor of the merger.

In appellate cause number 01-08-00119-CV, appellant, Raymond Somers,

derivatively on behalf of EGL, Inc. , challenges the trial court's order dismissing his

breach of fiduciary duty claims brought against appellees, James R. Crane, Milton

Carroll, James C. Flagg, Frank J. Hevrdejs, Paul W. Hobby, Michael K. Jhin, Neil E.

Kelley, Sherman Wolff, Centerbridge Partners, L.P., the Woodbridge Co., Ltd., and

Nominal Defendant EGL, Inc. based on appellees' pleas to the jurisdiction. In a

single issue, Somers contends that the trial court erred in granting appellees' pleas to

the jurisdiction on the ground that Somers lacked standing to sue derivatively on

EGL's behalf.

We affirm the orders of the trial court.

Factual and Procedural Background

In his fourth amended petition in appellate cause number 01-07-00754-CV,

Somers alleges that Crane, who was EGL's Chairman, Chief Executive Officer, and

dominating shareholder, and Carroll, Flagg, Hevrdejs, Hobby, Jhin, Kelley, and

Sherman, who were EGL's Board of Directors, engaged in efforts to "complete a

management-led buyout of EGL" at an inadequate price as well as efforts "to provide

certain insiders and directors with preferential treatment at the expense of . . . and

unfair to [EGL's] public shareholders." Somers asserts that a "Special Committee,"

which was appointed by and made up of Board members who "were dominated and

controlled by Crane," "collectively engaged in a scheme to unfairly sell the Company

to Crane" for an undervalued price (the alleged "Crane Acquisition").

Somers 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 offered by

the Buyout Group consisting of Crane, Centerbridge, and Woodbridge, but they

"failed to tell shareholders" that a third party, Apollo Management LP, had submitted

a higher bid that the Special Committee had refused to consider. Somers asserts that

appellees breached their fiduciary duties by initially refusing to consider this

competing offer and by subsequently agreeing to "lock up" the "Crane Acquisition

with [allegedly] onerous deal protection devices," such as a $30 million termination

fee, 51% of which was payable directly to Crane, if the Crane Acquisition was not

consummated. Somers complains that these and other deal-protection devices made

"it impossible for any bidder other than the Buyout Group to buy [EGL] directly" and,

because of the deal protection devices, Apollo and other competing bidders were

significantly disadvantaged in the sales process.

Somers further alleges that Apollo, which remained interested in buying EGL,

brought suit against appellees and, upon learning of Apollo's lawsuit, Somers, on

April 11, 2007, filed a motion for temporary injunction and appointment of receiver

"aimed at securing an open sales process." Somers agrees in his petition that Apollo

had ultimately made the prevailing bid, and, on May 24, 2007, EGL announced that

it had entered into a merger agreement with Apollo. However, Somers complains that

EGL also announced that it had paid the termination fee to the Buyout Group, a

significant portion of which went directly to Crane. (2)

Somers asserts claims against appellees for breach of fiduciary duty and

contends that appellees Centerbridge and Woodbridge engaged in a conspiracy and

aided and abetted appellees' breach of fiduciary duty. Somers also asserts that

appellees engaged in self-dealing, "abuse of control," "gross mismanagement," and

"waste of corporate assets." Somers notes that he brought his suit derivatively, and

he represents that he will "adequately and fairly" represent the interests of EGL and

its shareholders. Somers further asserts that he owned EGL stock "during all relevant

times" and he made demands upon the Board on January 4, 2007, March 20, 2007,

and April 4, 2007, pursuant to article 5.14(c) of the Texas Business Corporation Act,

but the Board did not comply with his demands and EGL is being irreparably

harmed. (3)

In his prayer, Somers requests an order directing appellees to exercise their

fiduciary duties to obtain a transaction in EGL's best interest, rescinding the Crane

Acquisition or any terms thereof, and imposing a constructive trust upon any benefits

improperly received by appellees, including the termination fee.

The Class, in its consolidated amended class action, makes allegations similar

to those in Somers's petition, but the Class sues appellees directly rather than

derivatively. Like the claims asserted by Somers, the Class asserts claims for breach

of fiduciary duties and aiding and abetting breach of fiduciary duties against

appellees .

Appellees filed their motion to dismiss and special exceptions, which the trial

court granted. Somers then filed his motion for leave to amend, and he requested

findings of fact and conclusions of law, which the trial court denied. The Class filed

its motion for reconsideration and new trial and motion for leave to amend petition,

both of which the trial court denied.

In response to the arguments made by appellees in appellate cause number 01-07-00754-CV that he had not provided proper pre-suit notice, Somers made another

pre-suit demand in June 2007, waited 90 days, and then filed his second derivative

suit, appellate cause number 01-08-00119-CV, on September 18, 2007, after the EGL

merger had been consummated and after he had lost his shareholder status. The Class

was not a party to this second suit. Somers's factual allegations in this second suit

largely mirror those contained in his petition in the first suit. Additionally, Somers

alleges that, on July 31, 2007, EGL held a meeting where shareholders were asked to

approve the merger with Apollo, a majority of the shares represented voted in favor

of the merger, and Apollo's acquisition of EGL was consummated on August 2, 2007.

Somers reasserts the same claims against the individual appellees for breach

of fiduciary duty, "self-dealing," "abuse of control," "gross mismanagement," and

"waste of corporate assets." Against appellees Centerbridge and Woodbridge,

Somers asserts claims for conspiracy and aiding and abetting breach of fiduciary duty.

Somers also similarly asserts that he would "adequately and fairly" represent the

interests of EGL and its shareholders in this second suit, and he asserts that he owned

EGL stock "during all relevant times." Somers further states that, pursuant to article

5.14(c), he made demand upon the Board on June 12, 2007 "to immediately take steps

to ensure that [EGL] was compensated for the Board's breaches of fiduciary duty,

either by voluntarily repaying the $30 million in damages caused to [EGL] when the

termination fee was paid, or by commencing a legal proceeding on behalf of the

Company against each EGL Board member for their breaches of fiduciary duty."

Somers states that he "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 10,

2007."

In his prayer, Somers requests an order declaring that, by agreeing to the Crane

Acquisition, appellees breached their fiduciary duties as well as an order rescinding

the payment of the termination fee to the Buyout Group and awarding damages to

EGL and its former shareholders.

Appellees filed pleas to the jurisdiction, arguing that Somers lacks standing to

bring the derivative suit on behalf of EGL because, in light of Apollo's acquisition

of EGL, Somers was no longer an EGL shareholder at the time he filed suit. The trial

court granted appellees' pleas and dismissed Somers's suit.

Standard of Review

"We review a trial court's dismissal of a case upon special exceptions for

failure to state a cause of action as an issue of law, using a de novo standard of

review." Alpert v. Crain, Caton, & James, P.C. , 178 S.W.3d 398, 405 (Tex.

App.--Houston [1st Dist.] 2005, pet. denied); Shirvanian v. DeFrates , 161 S.W.3d

102, 105 (Tex. App.--Houston [14th Dist.] 2004, pet. denied). We accept as true all

of the plaintiff's material factual allegations and all reasonable inferences from those

allegations. DeFrates , 161 S.W.3d at 105 .

We also review de novo a trial court's ruling on a plea to the jurisdiction,

which is a dilatory plea that seeks dismissal of a case for lack of subject matter

jurisdiction, because subject matter jurisdiction is a question of law. Harris County

v. Sykes , 136 S.W.3d 635, 638 (Tex. 2004); Texas Nat. Res. Conservation Comm'n

v. IT-Davy , 74 S.W.3d 849, 855 (Tex. 2002). In reviewing the trial court's ruling on

a plea to the jurisdiction, we construe the pleadings liberally in favor of the plaintiff

and determine if the plaintiff is alleging facts that affirmatively demonstrate the

court's jurisdiction to hear the cause. Villarreal v. Harris County , 226 S.W.3d 537,

541 (Tex. App.--Houston [1st Dist.] 2006, no pet.). We may also consider evidence

necessary to resolve the jurisdictional issues raised. County of Cameron v. Brown ,

80 S.W.3d 549, 555 (Tex. 2002). If the pleadings affirmatively negate the existence

of jurisdiction, then the trial court may grant a plea to the jurisdiction without

providing the plaintiff an opportunity to amend. Tex. Dep't of Parks & Wild. v.

Miranda , 133 S.W.3d 217, 227 (Tex. 2004).

The Class Appeal

Fiduciary Duties Owed Directly to Shareholders

In appellate cause number 01-07-00754-CV, in its first issue, the Class argues

that the trial court erred in granting appellees' motion to dismiss because "[i]n a cash-out merger where the corporation will no longer exist in its pre-merger form and the

shareholders will be dispossessed of any interest in the corporation after the merger,

. . . the directors of a Texas corporation owe [a] fiduciary duty directly to the

shareholders of a corporation." Appellees argue that the trial court properly granted

their special exceptions and dismissed the shareholder class action because the Class

has "no direct right of action against [appellees] for alleged breach of fiduciary duty."

"A director's fiduciary duty runs only to the corporation, not to individual

shareholders or even to a majority of the shareholders." Hoggett v. Brown , 971

S.W.2d 472, 488 (Tex. App.--Houston [14th Dist.] 1997, pet. denied) (citing

Gearhart Indus., Inc. v. Smith Int'l Inc. , 741 F.2d 707, 721 (5th Cir. 1984) and

Schautteet v. Chester State Bank , 707 F. Supp. 885, 888 (E.D. Tex. 1988)); see also

In re Webber , 350 B.R. 344, 364 (S.D. Tex. 2006) ("With respect to a formal

fiduciary relationship, a corporate officer's fiduciary duty generally runs only to the

corporation and not to individual shareholders."); Scherrer v. Haynes and Boone,

L.L.P. , No. 01-99-01164-CV, 2002 WL 188825 (Tex. App.--Houston [1st Dist.] Feb.

7, 2002, no pet.) (opinion not designated for publication) ("A corporate director's

fiduciary duty runs only to the corporation, not to individual shareholders."); Aitlqaid

v. Soussan , No. 01-98-01017-CV, 2001 WL 301430 (Tex. App.--Houston [1st Dist.]

Mar. 29, 2001, no pet.) (opinion not designated for publication) (same); A. Copeland

Enters., Inc. v. Guste , 706 F. Supp. 1283, 1288 (W.D. Tex. 1989) ("Claims

concerning breach of a corporate director's fiduciary duties can only be brought by

a shareholder in a derivative suit because a director's duties run to the corporation,

not to the shareholder in his own right."). "[T]he right to proceed against an officer

or former officer of a corporation for breaching a fiduciary duty owed to the

corporation belongs to the corporation itself." Grinnell v. Munson , 137 S.W.3d 706,

718 (Tex. App.--San Antonio 2004, no pet.). "While corporate officers owe

fiduciary duties to the corporation they serve, they do not generally owe fiduciary

duties to individual shareholders unless a contract or confidential relationship exists

between them in addition to the corporate relationship ." Cotten v. Weatherford

Bancshares, Inc. , 187 S.W.3d 687, 698 (Tex. App.--Fort Worth 2006, pet. denied)

(emphasis added); see also Grinnell , 137 S.W.3d at 718 . Due to the "extraordinary

nature" of a fiduciary relationship, the law does not recognize such a relationship

lightly. Cotten , 187 S.W.3d at 698 .

Here, the Class does not allege that it had a separate contract with appellees nor

that it had a special or confidential relationship of the kind previously recognized by

Texas courts sufficient to create a fiduciary duty. See Hoggett , 971 S.W.2d at 488

n.13 (stating that "in certain limited circumstances, a majority shareholder who

dominates control over the business may owe such a duty to the minority

shareholder"). The Class's relationship with appellees was solely a corporate

relationship.

The Class contends that there is a "special relationship" between directors and

shareholders created in the context of a cash-out merger. The Class asserts that "it

is hardly clear that a general rule based on a corporate relationship should apply as

normally after that corporate relationship ceases to exist." However, the Class

concedes that there is no Texas authority recognizing the creation of such a duty in

a cash-out merger. Because fiduciary relationships are of an "extraordinary nature"

and should not be recognized lightly, and because of the abundant authority stating

that a director's or officer's fiduciary duty runs only to the corporation, not to

individual shareholders, we decline to recognize the existence of a fiduciary

relationship owed directly by a director to a shareholder in the context of a cash-out

merger. Accordingly, we hold that the Class cannot bring a cause of action directly

against appellees for breach of fiduciary duty. We further hold that the trial court did

not err in sustaining appellees' special exceptions on this ground and in dismissing

the Class's suit.

We overrule the Class's first issue.

Denial of Motion for New Trial

In its second issue, the Class contends that the trial court erred in denying its

new trial motion so that it could plead new causes of action based upon "false and

misleading statements" in a proxy that solicited the shareholders' votes in favor of the

merger. Appellees argue that the trial court did not abuse its discretion in denying the

Class's motion for leave to amend because the Class "sought to amend their [sic]

petition to assert a new claim that could not have been brought until after the trial

court dismissed their petition because it was based on subsequent events."

In support of its argument that the trial court abused its discretion in denying

its new trial motion and request to amend its pleadings, the Class cites, among other

cases, Weidner v. Sanchez , 14 S.W.3d 353, 376 (Tex. App.--Houston [14th Dist.]

2000, no pet.). In Weidner , the court stated that "[a] trial court has no discretion to

refuse a post-verdict amendment of pleadings unless the opposing party presents

evidence of surprise or prejudice, or the amendment asserts a new cause of action or

defense and the opposing party objects to the amendment ." Id. (emphasis added). Here, the trial court signed its order granting appellees' motions to dismiss and

special exceptions on June 8, 2007. In its motion for reconsideration and new trial

and motion for leave to amend, the Class asserted that, on June 26, 2007, two weeks

after the trial court dismissed its suit, EGL filed a proxy statement that was

"materially false and misleading." The Class sought to amend its petition to add

"direct" claims related to these proxy statements. Appellees filed a response to this

motion, objecting to the Class's efforts to amend its petition and add these claims.

Because the Class sought to add new claims arising out of a proxy statement that

issued after the trial court had dismissed the Class's original breach of fiduciary duty

claims, and because appellees objected to the Class's efforts to add these new causes

of action after the trial court had already dismissed the original case, we hold that the

trial court did not abuse its discretion in denying the Class's motion for

reconsideration and new trial and motion for leave to amend seeking to add these new

claims.

We overrule the Class's second issue.

Somers's Derivative Standing

In appellate cause number 01-08-00119-CV, in a single issue, Somers contends

that the trial court erred in granting appellees' pleas to the jurisdiction on the ground

that Somers lacked standing to sue derivatively on EGL's behalf. Somers asserts that

"[u]nder the plain meaning of the Texas Business Corporation Act, he has standing

to prosecute the derivative action" and"[a]ny other conclusion would make Texas the

only jurisdiction in which shareholders have absolutely no mechanism to secure a

remedy for corporate misconduct in the context of a merger transaction." Appellees

respond that "[i]t is well established under Texas law that a shareholder must own

stock at the time of filing a derivative suit and continuously through the completion

of the suit to have derivative standing," and, since it was undisputed that Somers was

not a shareholder at the time he filed suit, the trial court properly granted their pleas

to the jurisdiction.

Article 5.14(B) of the Texas Business Corporation Act, entitled "Derivative

Proceedings," provides,

B. Standing.

A shareholder may not commence or maintain a derivative proceeding

unless the shareholder:

(1) was a shareholder of the corporation at the time of

the act or omission complained of or became a

shareholder by operation of law from a person that

was a shareholder at that time; and

(2) fairly and adequately represents the interests of the

corporation in enforcing the right of the corporation.

Tex. Bus. Corp. Act Ann. art. 5.14(B) (Vernon 2003). Shareholder is defined in the

Business Corporation Act to mean "the person in whose name shares issued by a

corporation are registered at the relevant time in the share transfer records maintained

by the corporation pursuant to Article 2.44 of this Act." Id . art. 1.02(A)(22) (Vernon

Supp. 2008). (4) Subsection (M) of article 5.03 of the Texas Business Corporation Act,

entitled "Action on Plan of Merger or Exchange," provides, " To the extent a

shareholder of a corporation has standing to institute or maintain derivative

litigation on behalf of the corporation immediately before a merger, nothing in this

article may be construed to limit or extinguish the shareholder's standing." Id . art.

5.03(M) (Vernon Supp. 2008).

We start with the plain meaning of the controlling statute, article 5.14.

Although the parties present opposing constructions of the plain meaning of this

article, we conclude that article 5.14(B) states, in no uncertain terms, that "[a]

shareholder may not commence or maintain a derivative proceeding unless the

shareholder . . . ." meets certain requirements. Tex. Bus. Corp. Act Ann. art.

5.14(B) (Emphasis added). Article 5.14(B) refers twice to shareholders, not former

shareholders. Accordingly, we hold that, under the plain language of article 5.14(B),

Somers is not entitled to bring a derivative proceeding.

Our holding is consistent with the only Texas case to squarely address

derivative standing under article 5.14(B), albeit a predecessor version that has since

been amended. See Zauber v. Murray Sav. Ass'n , 591 S.W.2d 932, 935 (Tex. Civ.

App.--Dallas 1979), writ ref'd per curiam, 601 S.W.2d 940 (Tex. 1980). The court

in Zauber considered a former version of article 5.14(B), which provided that "[a]

derivative suit may be brought in this State only if: (1) The plaintiff was a record or

beneficial owner of shares . . . at the time of the transaction of which he complains

. . . ." Id. at 936 (citing former Tex. Bus. Corp. Act Ann. art. 5.14(B)). In applying

this article, the Zauber court explained,

The requirement in article 5.14(B) that in order to bring a derivative suit

a plaintiff must have been a shareholder at the time of the wrongful

transaction, is only a minimum requirement . The federal rule governing

derivative suits, which contains similar requirements to article 5.14(B),

has been construed to include a further requirement that shareholder

status be maintained throughout the suit . The reasoning behind allowing

a shareholder to maintain a suit in the name of the corporation when

those in control wrongfully refuse to maintain it is that a shareholder

has a proprietary interest in the corporation . Therefore, when a

shareholder sues, he is protecting his own interests as well as those of

the corporation. If a shareholder voluntarily disposes of his shares after

instituting a derivative action, he necessarily destroys the technical

foundation of his right to maintain the action. If, on the other hand, a

shareholder's status is involuntarily destroyed, a court of equity must

determine whether the status was destroyed without a valid business

purpose; for example, was the action taken merely to defeat the

plaintiff's standing to maintain the suit?

Id . at 937-38 (emphasis added) (citations omitted). Thus, the court in Zauber

indicated that a shareholder must remain a shareholder in order to maintain a

derivative suit. Id .; see also Prudential-Bache Secs., Inc. v. Matthews , 627 F. Supp.

622, 624 (S.D. Tex. 1986) (stating that "[s]tanding to bring a derivative action arises

from the proprietary interest created by the stockholder relationship and the possible

indirect benefits the nominal plaintiff may acquire qua stockholder of the corporation

which is the real party in interest" and that "Texas law mandates that a derivative

plaintiff maintain status as a shareholder"); Lewis v. Ward , 852 A.2d 896, 902-04

(Del. 2004) (reviewing cases that have applied general rule holding that

stockholder-plaintiff may not continue to pursue derivative claims following merger

that eliminates plaintiff's shareholder status unless facts are alleged that fall within

one of two exceptions to general rule); (5) Schreiber v. Carney , 447 A.2d 17, 21 (Del.

Ch. 1982) (stating that plaintiff who brings derivative suit on behalf of corporation

must be stockholder of corporation at time he commences suit and that "it is clear that

a merger which eliminates a complaining stockholder's ownership of stock in a

corporation also ordinarily eliminates his status to bring or maintain a derivative suit

on behalf of the corporation, whether the merger takes place before or after the suit

is brought, on the theory that upon the merger the derivative rights pass to the

surviving corporation which then has the sole right or standing to prosecute the

action").

Somers seeks to distinguish Zauber by noting that the Legislature amended

former article 5.14(B) in 2003 to provide that "[a] shareholder may not commence or

maintain a derivative proceeding unless the shareholder: (1) was a shareholder of the

corporation at the time of the act or omission complained of . . . ." Tex. Bus. Corp.

Act Ann. art. 5.14(B) (emphasis noted by Somers). But the implied requirement

recognized by the Zauber court that a shareholder must remain a shareholder and

retain his shareholder status to maintain a derivative suit did not expressly appear in

former article 5.14(B), and nothing in the amended version of article 5.14(B) conflicts

with Zauber either. See Zauber , 591 S.W.2d at 937 (stating that requirement in

article 5.14(B) was "only a minimum requirement"). As noted by appellees in their

briefing, "Under either version of the statute, Somers would have had standing were

contemporaneous ownership sufficient." In accord with the plain language of article

5.14, we hold that a plaintiff seeking to derivatively enforce the rights of a

corporation must be a shareholder.

Somers also argues that article 5.03(M) of the Texas Business Corporation Act

supports his contention that he has standing to commence and maintain the derivative

suit even though it is undisputed that he was not a shareholder at the time he filed

suit. However, we agree with appellees that nothing in article 5.03(M) confers

standing. Rather, article 5.03(M) merely states that " To the extent a shareholder of

a corporation has standing to institute or maintain derivative litigation on behalf of

the corporation immediately before a merger, nothing in this article may be construed

to limit or extinguish the shareholder's standing." Id . art. 5.03(M) (emphasis added).

Appellees present multiple theories on the effect or meaning of article 5.03(M),

specifically asserting that article 5.03(M) should be construed, at most, to mean that

a shareholder's standing is not destroyed when that shareholder receives stock in a

new corporation rather than cash after a cash-out merger. In that instance, appellees

acknowledge that a shareholder might continuously maintain an economic interest in

the derivative recovery on behalf of the corporation, but such is not the case where,

like here, the plaintiff receives cash in a cash-out merger and no longer owns any

shares. See Blasband v. Rales , 971 F.2d 1034, 1041 (3d Cir. 1992) ("Where there has

been a cash-out merger, it is clear that a former shareholder may not maintain a

derivative action, for he or she would no longer have an interest in a subsequent

corporate recovery. . . . However, where, as here, the plaintiff receives shares of a

new corporate entity, the standing issue is less clear, as the plaintiff will have a

financial interest in the derivative action."). We agree and hold that article 5.03(M)

does not confer standing on a former shareholder like Somers who otherwise lacks

standing. (6)

We overrule Somers's sole issue in appellate cause number 01-08-00119-CV.

Conclusion

In appellate cause number 01-07-00754-CV, we affirm the trial court's orders

dismissing the Class's claims against appellees and denying the Class's new trial

motion. In appellate cause number 01-08-00119-CV, we affirm the order of the trial

court dismissing Somers's claims against appellees because Somers, as a former

shareholder, lacks derivative standing. We similarly hold, in appellate cause number

01-07-00754-CV, that even if the trial court erred in granting appellees' motion to

dismiss and special exceptions or even if the trial court abused its discretion in

denying Somers's motion for leave to amend and request for findings of fact and

conclusions of law, Somers would lack standing to pursue his claims derivatively

because it is undisputed EGL no longer exists and Somers is no longer a shareholder.

Our holding that Somers is not entitled to pursue his claims derivatively is dispositive

of his claims in both appellate cause numbers.

Terry Jennings

Justice

Panel consists of Justices Jennings, Hanks, and Bland.

1. See Tex. Bus. Corp. Act Ann. art. 5.14(C) (Vernon 2003).

2.

Somers's fourth amended petition, the live petition at the time the trial court

dismissed his claims, was filed on May 25, 2007, one day after EGL's announcement

that it had entered into a merger agreement with Apollo and paid the termination fee

to Crane's Buyout Group.

3.

Recognizing that article 5.14 does not contain a futility exception, Somers has not

asserted on appeal that he was excused from making a demand because such a

demand was futile, but rather has only argued that his demand complied with article

5.14. See Tex. Bus. Corp. Act Ann. art. 5.14(C).

4.

Article 5.14(A)(2) further provides that "'[s]hareholder' includes a beneficial owner

whose shares are held in a voting trust or by a nominee on the beneficial owner's

behalf." Tex. Bus. Corp. Act Ann. art. 5.14(A)(2) (Vernon 2003).

5.

The court stated that there were two exceptions "to its holding that only a current

shareholder has standing to maintain an action that is derivative in nature: (i) if the

merger itself is the subject of a claim of fraud, being perpetrated merely to deprive

shareholders of the standing to bring a derivative action; or (ii) if the merger is in

reality merely a reorganization which does not affect plaintiff's ownership in the

business enterprise." Lewis v. Ward , 852 A.2d 896, 902 (Del. 2004). Even assuming

that Texas law may recognize similar exceptions to this general rule, see Zauber v.

Murray Sav. Ass'n , 591 S.W.2d 932, 935 (Tex. Civ. App.--Dallas 1979), writ ref'd

per curiam, 601 S.W.2d 940 (Tex. 1980), they do not apply here. Somers does not

allege that the merger was perpetrated to commit a fraud, nor does he allege any

wrongdoing by Apollo, the eventual purchaser of EGL. We note that Somers is not

seeking to void the Apollo acquisition. Somers's sole argument is that, under Texas

law, a former shareholder may both commence and maintain a derivative suit on

behalf of a company that has been merged out of existence.

6.

In support of his arguments that article 5.03(M) may confer standing on a former

shareholder to bring a derivative suit, Somers cites Marron v. Ream , No. CIVA

H-06-1394, 2006 WL 2734267 (S.D. Tex. May 05, 2006). However, we agree with

appellees that the issue of standing of a former shareholder to bring suit derivatively

is not squarely addressed in Marron and that the statements cited by Somers are dicta .

Id . at *7 (suggesting that shareholder who may give up shares if merger is

consummated " may still not be deprived of his opportunity to institute or maintain a

derivative suit on behalf of [the company]") (emphasis added).