Opinion

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN

NO. 3-90-206-CV

EARL WHITE,

APPELLANT

vs.

EGGHEAD ENTERPRISES, INC., RONALD CRAIG McGUIRE,

INDIVIDUALLY AND FIRST CITY NATIONAL BANK OF

SAN ANGELO, AS TRUSTEE OF THE RONALD CRAIG

McGUIRE TRUST,

APPELLEES

FROM THE DISTRICT COURT OF TOM GREEN COUNTY, 51ST JUDICIAL DISTRICT

NO. CV87-0593-A, HONORABLE JOHN E. SUTTON, JUDGE

Earl White sued Egghead Enterprises, Inc. (a corporation organized and formerly

existing under the laws of the State of Texas), Ronald Craig McGuire, and First City National

Bank of San Angelo (in the bank's capacity as trustee of the Ronald Craig McGuire Trust),

praying for a declaratory judgment that Earl owned eighteen percent of the outstanding shares of

stock in Egghead. (1) Following a bench trial, the court below rendered judgment that Earl and his

wife, Linda White, owned jointly 5.37% of the outstanding shares. Earl appeals. We will affirm

the judgment.

THE CONTROVERSY

On May 20, 1982, Craig and his father, Troy McGuire, obtained from the

Secretary of State the articles of incorporation for Egghead Enterprises, Inc., a close corporation.

The articles provided that Egghead would be managed by the shareholders rather than the

directors. On June 15, 1982, Troy, Craig, and Craig's sister held the organizational meeting,

elected themselves directors and officers of the corporation, and adopted bylaws. (2) While the

minutes do not reflect any act by anyone that authorized the issuance of shares, a share certificate

was issued to Craig or perhaps to Troy evidencing ownership of 5,000 shares of Egghead capital

stock. (3)

At about the same time, Craig and Troy sought from Earl White, Troy's brother-in-law, advice about investing funds Craig had received on a personal-injury recovery. As a result,

Earl found in Dallas County a seven-acre tract of land that Egghead subsequently purchased. The

record does not reveal how the corporation acquired the money necessary to make the purchase.

Craig may have lent the money or the corporation may have obtained it by Craig's payment for

the 5000 shares mentioned above.

Thereafter, the following transactions occurred in connection with the capital stock

of the corporation:

Affirmation of Craig's 5000 shares . In late June 1982, Troy, Craig, and Earl met

with Charles Carruth, a Dallas attorney recommended by Earl. They wished to make sure that

Egghead's organizational meeting was properly "documented." Troy and Craig told Carruth that

the corporation had previously issued 5000 shares to Craig or Troy. They could not find the share

certificate, they told Carruth, but the corporation actually "belonged" to Craig because his money

capitalized Egghead. Carruth prepared a new set of bylaws and other documents, including the

minutes of an organizational meeting. (4) The new minutes declared that Craig was the sole director,

officer, and shareholder, and that he had authorized the corporation to issue to himself 5000

shares of stock in consideration of one dollar per share. While the minutes formally authorized

for the first time the issuance of any shares of capital stock and their sale to Craig, the latter

transaction was not evidenced by a share certificate, apparently on the theory that the previously

issued certificate was sufficient. In August or September 1982, however, Carruth wrote

"certificate void" on the blank stock-register stub that corresponded to the missing stock certificate

evidencing Craig's 5000 shares. This action may have been taken at Craig's direction. The

record does not indicate any underlying basis for the action, such as Craig's transfer of the 5000

shares to someone else or the corporation's acquisition of his 5000 shares.

Acquisition of 970 shares by the Ronald Craig McGuire Trust . In late 1982 or

early 1983, Craig created for his benefit (with Carruth's assistance) the "Ronald Craig McGuire

Trust." The trust instrument assigned to the co-trustees, Carruth and the North Dallas Bank &

Trust, "discretion and complete power to administer" the trust as well as "all powers conferred

on trustees by the Texas Trust Act." On August 25, 1983, the co-trustees received from the

corporation a certificate for 970 shares. The record does not reveal the character of these 970

shares as being: (1) shares newly issued by the corporation in addition to the 5000 shares issued

earlier to Craig; or (2) shares included within the 5000 shares issued to Craig, which he then

transferred to the trust, the certificate being issued to reflect the trust's new ownership of the

shares. Because the record is silent regarding any corporate act suggesting the issuance of any

new shares, in addition to the 5000 shares, one must conclude that the second proposition is the

only logical one.

Acquisition of 270 shares by Earl and Linda White . In the same meeting in late

1982 or early 1983, Craig and Carruth decided to create a compensation scheme for Earl, who

had been managing Egghead's business and supervising the construction of buildings on the seven-acre tract. Earl's pay for the work had been meager because Egghead lacked the cash to pay him

more. On August 25, 1983, Earl and Egghead entered into a written contract under which Earl

would receive a quantity of the corporation's stock, equal in value to $18,000, as payment for

work he had previously done. The contract also provided that Earl would receive for his future

work an annual salary of $25,000 and fifteen percent of the corporation's profits. On August 25,

1983, Craig, the sole director of Egghead, held a special meeting of the board of directors. The

minutes of the meeting declare a resolution "that the corporation issue 30 shares of EGGHEAD

ENTERPRISES, INC. to Earl White, who has been an employee of the corporation since

January." This is the only instance in which the directors formally authorized the issuance of any

capital stock, in addition to the 5000 shares authorized to be issued and sold to Craig in the

beginning.

In October 1983, the corporation purportedly issued to Earl and Linda a certificate

for 225 shares, and in August 1984 the corporation purportedly issued to them a certificate for

an additional fifteen shares. (5) The record contains no showing, however, that the board of

directors authorized the issuance of any new shares in addition to the 5030 previously issued from

the 100,000 total shares authorized by the articles of incorporation. Moreover, neither Craig nor

either of the trustees signed the stock certificates.

THE TRIAL-COURT PROCEEDINGS

In 1986, the corporation dissolved and all its assets were sold. In 1987, Earl sued

Egghead, Craig, and the trust. Earl alleged three causes of action. He sued on his contract and

in quantum meruit to recover sums due him for his work in behalf of the corporation. He joined

to these a cause of action to obtain a declaratory judgment that he owned eighteen percent of the

outstanding shares of Egghead capital stock. Only the declaratory judgment action is before us

on appeal. Earl did not sue for an accounting of any kind or for the value of the shares he

believed he owned; he did not assail the bona fides of Egghead's corporate existence or allege that

it was the alter ego of Craig; he did not attack the creation of the trust or its terms.

The trial court determined after trial that Earl and Linda jointly owned 270 shares,

or 5.37% of the total of 5030 shares that the corporation had issued from the 100,000 shares

authorized by its articles of incorporation. The trial-court findings of fact and conclusions of law

indicate the trial court's reasoning:

1. By formal resolution of the board of directors, Egghead authorized the issuance

of 5030 shares, being the total of the 5000 shares authorized in June 1982 for sale to Craig and

the thirty shares authorized August 25, 1983 for delivery to Earl in consideration of services

previously performed by him.

2. All 5030 shares were outstanding at the time of trial because none had ever been

canceled for any reason. At the time of trial the 5030 shares were owned as follows:

3. Craig owned 3790 shares, being the remainder of his 5000 shares after

deducting his transfer of 970 shares to the trust and his transfer of 240 shares to Earl and Linda

as a gift, as evidenced by the share certificates issued August 25, 1983.

4. Earl and Linda owned 270 shares, being the total of the thirty shares authorized

by the board of directors on August 25, 1983 and the 240 shares they acquired by gift and transfer

from Craig, as evidenced by the share certificates issued in October 1983 (225 shares) and August

1984 (fifteen shares).

The trial court rendered judgment accordingly. Earl appeals on two points of error.

POINTS OF ERROR

In his first point of error, Earl assails the foundation of the trial court's reasoning --

that 5030 shares were outstanding at the time of trial. He contends he proved as a matter of law

that there were 1000 shares outstanding on August 25, 1983. He points first to the fact that the

phrase "certificate void" was marked on the stub opposite the certificate for Craig's 5000 shares,

arguing that these shares were not "canceled" but simply reacquired by the corporation as treasury

stock. (6) Earl contends that from August 1982, when Carruth wrote "certificate void" on the

certificate stub, there were no shares outstanding until August 25, 1983, when the parties' actions

resulted in the issuance of 1000 newly issued and outstanding shares. This is the total of the 970

shares transferred to the trust on August 25, 1983, as evidenced by a share certificate of that date,

together with the thirty shares that the board of directors authorized for issuance to Earl on the

same date. By these transactions, Earl concludes, he acquired on August 25, 1983, three percent

of the 1000 shares that were outstanding. We note that under this theory Craig was no longer a

shareholder after August 25, 1983, although the trust owned and held 970 shares for his benefit.

In his second point of error, Earl contends he proved as a matter of law, or by the

great weight and preponderance of the evidence, the following transactions that resulted in his

owning eighteen percent of the outstanding shares at the time of trial:

1. After August 25, 1983, the board of directors authorized the issuance of 500

new shares in addition to the 1000 shares mentioned above.

2. Earl acquired 240 of these shares by issuance of the share certificates issued in

October 1983 (225 shares) and August 1984 (fifteen shares).

3. The trust acquired 260 of the newly issued shares at some unspecified time after

August 25, 1983, even though that proposition was not evidenced by any resolution of the board

of directors or by any share certificate.

4. As a result, there were outstanding at the time of trial only 1500 shares, of

which Earl owned eighteen percent or 270 shares (thirty acquired before August 25, 1983, and

240 shares acquired thereafter).

DISCUSSION AND HOLDINGS

We have examined carefully Earl's argument in light of all the evidence. Much

of the argument equates the issuance of a share certificate with the issuance of new shares from

among the 100,000 shares authorized by the articles of incorporation. The issuance of a share

certificate may also evidence, however, a recording on the corporate books of the transfer of

shares previously issued and then outstanding. For purposes of discussion, however, we will

accept Earl's assumption that the certificates involved in the present case all represented newly

issued shares. Much of Earl's argument also equates an intention to act with the act itself . We

will also accept for purposes of discussion this very doubtful assumption. Finally, Earl's entire

theory on appeal depends upon the legal rule that the acts of a sole shareholder may be tantamount

to the acts of the corporation itself. See Sutton v. Reagan & Gee , 405 S.W.2d 828, 836 (Tex.

Civ. App. 1966, writ ref'd n.r.e.); see also Caldwell v. Kingsbery , 451 S.W.2d 247, 251 (Tex.

Civ. App. 1970, writ ref'd n.r.e.) ("Where directors are the stockholders, they are the corporation

itself."). (7) We may take that rule only as far as its terms allow, however, and it cannot extend in

the present case so far as Earl would take it.

Earl's claim to own eighteen percent of 1500 outstanding shares requires a

determination that the corporation acquired as treasury shares the 5000 shares issued previously

to Craig, and a determination that the corporation thereafter issued 1500 new shares: 970 shares

issued to the trust; 270 shares issued to Earl; and 260 shares issued to Craig. (8) These actions, so

far as the evidence indicates, may have been inferred only from Craig's "intentions" in various

particulars under the rule that imputes to a corporation the informal actions of its sole shareholder.

Nevertheless, under Earl's own theory of the evidence, Craig was no longer a shareholder at all

after the corporation acquired as treasury stock the 5000 shares previously issued to Craig; under

Earl's theory, only the trust and Earl owned shares in Egghead. Thereafter , there could be no

application of the rule that would permit one to impute to Egghead any of Craig's informal actions

as a shareholder. Craig remained the only director, of course, but he might act in that capacity

only by formal resolution to the effect that the corporation: (1) acquired as treasury stock the

5000 shares previously issued to Craig; (2) issued 970 shares to the trust; (3) issued 240 shares

to Earl; and (4) issued 260 shares to Craig in consideration of something of value. There is no

evidence of any such resolutions by the board. Consequently, any issuance of 240 new shares to

Earl would be a nullity because Craig, as an individual, had no power to approve the issuance,

and as a director he could act only by a formal resolution which the evidence did not show. This

accounts for the trial court's theory that Craig transferred the 240 shares as a gift to Earl, the

certificate issued to Earl being only evidence of Craig's gift from among his 5000 shares.

The foregoing is not changed by the fact that Craig was the beneficiary of the trust.

Under the terms of the trust, only the trustee, the North Dallas Bank & Trust, and the co-trustee,

Charles Carruth, had the power to act on behalf of the trust, (9) and, of course, Craig had no power

to issue an additional 240 shares to Earl merely by virtue of his position as beneficiary of the

trust. (10)

The trial court determined that Earl and Linda owned jointly 5.37% of the

outstanding 5030 shares. If carried to the scope permitted by its terms, Earl's theory, based solely

upon the rule which imputes to a corporation the acts of its sole shareholder, would result in Earl

and Linda owning only thirty of 1000 outstanding shares, or three percent of those shares -- a

quantity less than that awarded by the trial court. Therefore, we need not consider whether the

trial court erred in any particular urged by Earl. It is apparent that any such error was harmless

and cannot require a reversal of the judgment below. Tex. R. App. P. Ann. 81(b) (Pamph. 1992).

We hold accordingly. We overrule both points of error and affirm the judgment.

John Powers, Justice

[Before Justices Powers, Jones and B. A. Smith]

Affirmed

Filed: February 26, 1992

[Do Not Publish]

1. Egghead Enterprises, Inc. is now dissolved. White sued, however, within three years of

the dissolution, a period during which the corporation continued its corporate existence for the

purpose of defending or prosecuting actions on claims existing, or any liability incurred, before

dissolution. See Tex. Rev. Civ. Stat. Ann. art. 1302-2.07 (1980) (since repealed by 1987 Tex.

Gen. Laws, ch. 93, § 48(b), at 230).

2. Although the articles of incorporation stated that Egghead was a close corporation and

allowed it to be managed by shareholders rather than by a board of directors, the parties

invariably treated the corporation as a director-managed corporation. Moreover, they did not

prepare a shareholder agreement to provide for shareholder management. See Tex. Bus. Corp.

Act Ann. art. 12.34 cmt (Supp. 1992) (stating that inclusion of a statement in the articles of

incorporation that a corporation is a close corporation does not authorize the corporation to

operate as a close corporation, but only authorizes the shareholders to enter into an agreement

providing for shareholders' management). We will analyze the issues as though this was an

ordinary corporation, and not a close corporation, although this distinction actually has no bearing

on the result reached by our analysis.

3. The fledgling corporation did not have the benefit of legal advice in preparing these

documents. Craig or Troy obtained a form book for corporations, and proceeded according to

the directions and forms in that book.

4. The documents prepared by Carruth are dated May 20, 1982. Apparently Carruth or one

of the parties backdated these documents because May 20 precedes the June 15 date reflected on

the minutes and bylaws taken from the form book. There would have been no need to sign the

form documents had Carruth already prepared other documents.

5. It is not clear whether the parties considered these shares to be compensation for Earl's

work on Egghead's behalf, or whether they were gifts from Craig to Earl and Linda. Craig, who

was partially paralyzed, lived with Earl and Linda and depended on them for transportation, care,

and companionship. In his testimony, Earl referred to the shares as a gift, although he also

implied by his testimony that he considered the shares compensation for services he and Linda had

performed for Craig.

6. Carruth testified that he "canceled" the shares by marking "certificate void" on the stock

register stub. Earl apparently concedes, however, that the corporation did not redeem and cancel

the shares according to the procedures set out in the relevant statutes. See Tex. Bus. Corp. Act

Ann. arts. 4.08, 4.10 and 4.11 (1980 & Supp. 1992) (outlining steps for redemption and

cancellation of shares). Earl argues instead that Carruth and others used the term "cancellation"

loosely to mean some character of reacquisition of the shares by the corporation, which created

5000 treasury shares and left no shares owned by anyone except the corporation itself.

7. Many other courts and commentators subscribe to this rule as well. See, e.g., Myhre v.

Myhre , 544 P.2d 276, 282 (Mont. 1976) (when directors of a corporation are its only

shareholders, they may act for the corporation without formal meetings); see also 18B Am.Jur.2d

Corporations § 1449 (1985) ("Action taken by directors who are sole shareholders without a

formal meeting is corporate action, and any corporate obligation so created is binding on the

corporation."); 2 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations

§§ 394, 394.1, 395, at 271-76 (Charles R. P. Keating, Charity R. Miller, and Timothy P. Bjur

eds., rev. ed. 1990).

8. We doubt whether this sequence of events posited by Earl could legally occur. The

corporation's acquisition of the 5000 shares, without compensation paid to Craig, means that he

must have made a gift to Egghead of his shares, and thereafter owned none of the corporation.

From August 1982 to August 1983, then, the corporation would have owned itself, because all

of its shares would have been treasury shares. We question the legality of this result.

Moreover, a year later the corporation would had to have made a gift of 970 shares to the

trust, because the trust gave no consideration for the shares. This would not be valid. See Tex.

Bus. Corp. Act Ann. art. 2.16 (1980) (since amended by 1983 Tex. Gen. Laws, ch. 540, § 4, at

3150). In fact, under this theory, Earl would own all of the Egghead shares, since only he

provided consideration in the form of labor performed for his thirty shares. We cannot conclude

Craig intended this result.

9. Even though Carruth was a co-trustee and was involved in the events Earl complains of,

there is no evidence, and no party has suggested, that Carruth was acting in his capacity as a

trustee when he assisted Craig in these purported transactions. Even if Carruth was acting in his

capacity as trustee, he could not transfer the corporation's assets to Earl without the knowledge

and acquiescence of North Dallas Bank & Trust. See Brown v. Donald , 216 S.W.2d 679, 683

(Tex. Civ. App. 1949, no writ) (stating that when the trust instrument names more than one

trustee, the trustees must act jointly unless express authority is given to the contrary because

action taken by a trustee separately is not binding on the trust).

10. The trust instrument signed by Craig stated, "I grant to all my fiduciaries discretion and

complete power to administer my estate and I grant to all my fiduciaries all powers conferred on

trustees by the Texas Trust Act on fiduciaries." At the time Craig executed the trust instrument,

the Texas Trust Act gave trustees with legal title to securities the power, "except as limited by the

. . . trust instrument, [to] have and exercise all powers of an absolute owner in respect of such

securities." Tex. Rev. Civ. Stat. Ann. art. 7425b-25(F) (1960) (since repealed and codified as

amended at Tex. Prop. Code Ann. § 113.016 (1984)). The trust instrument imposed no

restrictions on the trustees' power to administer the securities.