General

A recent opinion rendered by the Texas Supreme Court[1] reaffirms several important corporate governance principles under Texas law. The court held that individual shareholders of a corporate entity did not have claims under Texas law against a third party based on the third party’s agreement with the corporate entity. The agreement did not create a separate duty to individual shareholders. The shareholders, thus, were required to pursue claims for injury to the entity via a derivative action. Absent both a personal cause of action and an individual injury, shareholders lacked the capacity to bring claims that the corporate entity owned. 

Background

The case was brought before the Supreme Court on a Petition for Writ of Mandamus because both the trial court and the court of appeals failed to dismiss the shareholders’ claims. The dispute arose in relation to a Maryland real estate investment trust known as United Development Fund IV (the “Trust”). The Trust’s bylaws designated Maryland as the exclusive forum for derivative actions brought on the Trust’s behalf. The Trust was not a party to the underlying lawsuit. The various “Relators” who filed the mandamus petition with the Supreme Court were an investment advisory firm as well as current and former trustees, managers and officers of the Trust and the advisory firm (collectively, the “Advisors”). The advisory firm entered into an investment advisory agreement with the Trust (the “Advisory Agreement”). Individual shareholders were not parties to the Advisory Agreement. The sections establishing the advisory firm’s duties referred to duties to the Trust.

Relying heavily on the Advisory Agreement, the shareholders sued the Advisors in a Dallas County, Texas district court claiming corporate waste and mismanagement by the Advisors and that the Advisors owed each Trust shareholder an individual duty, thus permitting the shareholders to sue the Advisors directly. The Advisory Agreement provided that Texas law governs suits arising out of it. The Advisors argued that the claims by the shareholders were derivative in nature and owned by the Trust and that the shareholders had neither standing nor capacity to sue the Advisors directly. 

Shareholders Had Standing but Lacked Capacity to Sue Directly

Based on the Supreme Court’s holding in Pike v. Texas EMC Management, LLC, 610 S.W.3d. 763 (Tex. 2020), the court concluded that the shareholders in the instant case had constitutional standing to pursue an injury claim for their financial losses due to the mismanagement by the Advisors.  

The court next examined whether the shareholders had the capacity to pursue and recover directly from the Advisors for their claims. The shareholders disavowed any intent to sue the Advisors derivatively and conceded that the Trust’s governing documents foreclosed a derivative action against the Advisors in Texas. Whether the shareholders can bring a derivative action was a question for Maryland courts to consider under Maryland law. The Advisors argued that the shareholders lacked the capacity to sue individually because the shareholders could not establish a personal cause of action or personal injury based on the Advisory Agreement. The court stated that suits for injuries to a corporation – including claims for diminution in stock value – ordinarily must be brought by the corporation itself or derivatively on its behalf. Nevertheless, a shareholder may individually sue for violation of a duty owed directly to that shareholder, but the duty must exist separate and apart from a duty to the corporate entity. The court concluded that the Advisory Agreement created duties to the Trust and the shareholders collectively but not to individual shareholders. To conclude otherwise would confer potentially conflicting duties on the Advisors responsible for managing the Trust’s investments and daily operations.

The shareholders alternatively argued that the Advisory Agreement conferred third party beneficiary status to the Trust’s shareholders affording them a direct cause of action. The court was unwilling to imply in the Advisory Agreement an intent to confer third party beneficiary status on thousands of individual shareholders. The indirect benefit to the shareholders from the investment and management services provided pursuant to the Advisory Agreement was not enough to support the claim. 

Because the shareholders lacked the capacity to sue directly for the claims they brought under the Advisory Agreement, the Supreme Court ordered the Advisors’ requested mandamus relief and instructed the trial court to dismiss the case with prejudice.

Conclusions

While the case did not directly involve a Texas corporation, the Supreme Court clearly was addressing the relevant issues under Texas corporate law. The opinion contains numerous citations to Texas court cases and Texas Business Organizations Code provisions. The opinion supports the following corporate governance principles under Texas law: 

1. Absent express terms creating a separate independent duty (or confirming third party beneficiary status) to individual shareholders, an agreement between a corporation and a third party can be enforced only by the corporation directly or by shareholders through a derivative action on behalf of the corporation.
2. Management, including investment advisors, of Texas corporations owe their duties to the corporation and shareholders collectively and not to individual shareholders.
3. While a direct claim by shareholders against a third party for their own financial losses may survive constitutional standing analysis, the shareholders generally do not have the capacity to make direct claims for the corporation’s losses but instead must make such claims derivatively on behalf of the corporation.

[1] In re UMTH General Services, L.P., UMT Holdings, L.P., UMTH Land Development, L.P., Hollis M. Greenlaw, Todd F. Etter, Ben L. Wissink, and Cara D. Obert, as Relators, 2025 WL 3180859, Case No. 24-0024 (Tex. – Nov. 14, 2025)