The Tennessee Supreme Court recently addressed the issue of whether shareholders of a corporation may bring claims directly on their own behalf, or whether certain claims must be brought as derivative actions on behalf of the corporation. Specifically, the court addressed the nature of shareholder standing in the context of both direct actions and derivative actions, based on the type of damages at issue in the lawsuit.

In the case of Houghton, et al. v. Malibu Boats LLC, No. E2023-00324-SC-R11-CV, the two plaintiffs were the sole shareholders of a Tennessee corporation that operated a dealership on property owned by the corporation. The plaintiffs alleged that the defendant’s tortious actions caused the dealership to go out of business, as well as the foreclosure of the real property owned by the corporation. The plaintiffs sued the defendant for intentional misrepresentation, fraudulent concealment and promissory fraud, seeking damages to corporate property and diminution in the value of their stock.

A jury awarded plaintiffs compensation for “loss of equity” in the buildings used to run the business. At a post-trial motion, the defendant, for the first time in the proceedings, orally raised an issue purporting to implicate subject matter jurisdiction. Specifically, the defendant argued that the plaintiffs lacked standing to assert a cause of action for damage to property that was owned by the corporation, not by the plaintiffs personally. The Tennessee Supreme Court analyzed whether the standing issues in the case were jurisdictional or prudential. The court concluded that shareholder standing limitations are prudential, not jurisdictional, and must be raised in a timely manner; otherwise, they are subject to forfeiture. Because the defendant did not raise the defense in a timely manner, it was waived.

On the substantive issue of whether or not the claims in the case belonged to the corporation and should have been brought derivatively on behalf of the corporation, or whether the plaintiffs had a cause of action on their own behalf, the Tennessee Supreme Court noted the general proposition that only a corporation may sue for injuries to corporate property. In the context of the fact that the corporation, not the plaintiffs, owned the real property at issue, the court examined the nature of direct shareholder injuries. The court noted that shareholders may bring individual actions for direct injuries to their legal rights as stockholders, even if the corporation also has a claim; however, they must comply with the procedural requirements of derivative actions if asserting corporate claims. However, given the axiomatic principle that a corporation and its shareholders are distinct parties, the nature of a shareholder’s claim must be analyzed to determine whether the shareholder has the requisite standing to bring a claim.

The court, noting the plaintiffs’ stock ownership in the corporation “clearly represented a cognizable private property right” which was allegedly damaged by the defendant’s tortious conduct, determined that the individual shareholders had constitutional standing. Next, in examining whether the plaintiffs had statutory standing, the Tennessee Supreme Court determined that the plaintiffs’ course of action in pursuing their own personal claims was “permitted even if the corporation also may have a cause of action growing out of the same wrong.” However, the court, as well as even the plaintiffs, seemed to give some credence to the defendant’s argument that the plaintiffs did not have shareholder standing because it was the corporation “that suffered the alleged harm and, thus, the [p]laintiffs were not directly injured by the loss of equity” in the property owned by the corporation. However, the defendant’s apparent victory on this singular point was hollow, as this distinction affects the merits, not “the authority of the court to adjudicate the dispute,” and must be timely raised.

While the doctrine of standing and its various corporate-related subdoctrines recently analyzed by the Tennessee Supreme Court may be ponderous to sort through at the outset of litigation, this case lays out a roadmap for doing so. This recent case also demonstrates the downside of not making such a determination early in the case (or at least at some point before a fact finder renders a decision) and raising the issue accordingly.

Justin Joy is a shareholder in the Memphis office of Lewis Thomason and leads the firm’s cybersecurity practice group. He provides counsel to clients in a variety of industries in the area of information privacy and cybersecurity including incident investigation and breach response management, regulatory compliance, privacy and security policy review and drafting, and cyber risk management. Joy is a Certified Information Privacy Professional/US (CIPP/US) and a Certified Information Privacy Technologist (CIPT) through the International Association of Privacy Professionals. He speaks frequently to various groups and organizations on the topic of information privacy and cybersecurity. Joy also regularly represents businesses and individuals in a variety of litigation matters including professional liability claims, insurance coverage disputes, business torts and commercial disputes. He also frequently advises business clients regarding a range of governance, operational and strategic matters. He is a 2001 graduate of Wake Forest University and holds a law and MBA degree from the University of Memphis.