Aztec Oil & Gas, Inc. v. Fisher: The Issue of Representative Shareholders

In Aztec Oil & Gas, Inc. v. Fisher, 2016 BL 16110 (S.D. Tex. Jan. 21, 2016), third party plaintiffs Frank Fisher (“Fisher”), Robert Sonfield (“Sonfield”), and the Livingston Growth Fund Trust (“Livingston”) by and through Livingston’s only trustee, Robert L. Sonfield, Jr. (“Sonfield Jr.”) (collectively, “Plaintiffs”) brought a third party shareholder derivative suit on behalf of themselves and Aztec Oil & Gas, Inc. (“Aztec Oil”) against third party defendants Jeremy Driver (“Driver”), Kenneth E. Lehrer (“Lehrer”), and Mark Vance (“Vance”) (collectively, “Defendants”) through allegations of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, waste, concerted action, and conspiracy. The United States District Court for the Southern District of Texas granted Defendants’ motion to dismiss the third party derivative suit pursuant to Fed. R. Civ. P. 23.1 (“Rule 23.1”).

Prior to the third party derivative suit’s commencement, Aztec Oil and Aztec Energy, LLC brought an action against Fisher, Sonfield, Mychal Jefferson (“Jefferson”), Livingston, and International Fluid Dynamics, LLC (“IFD”), a company Fisher owned, alleging violations of federal securities law, breach of fiduciary duty, fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conspiracy, legal malpractice, and violations of the Texas Deceptive Trade Practices Consumer Protection Act (the “Underlying Action”). While the Underlying Action was pending, Plaintiffs brought the third party derivative suit, which asserted Defendants, while acting as directors and officers of Aztec Oil, participated in conduct antithetical to shareholders. The derivative suit further alleged Aztec Oil failed to compensate IFD for consulting fees and Fisher for salary earned.

Defendants filed a motion to dismiss in response to Plaintiffs’ third-party claims, alleging Plaintiffs did not have standing to bring a derivative suit under Rule 23.1.

Rule 23.1 allows shareholders to bring a derivative action on behalf of a corporation to enforce a right the corporation failed to enforce. As required under Rule 23.1, a court will examine various factors to determine whether a shareholder’s derivative action fairly and adequately represents similarly situated shareholder interests. Among these factors are whether “economic antagonism” exists between the plaintiff and other shareholders, the “relative magnitude” of plaintiff’s interest in the derivative suit compared to its personal interest, and “plaintiff’s vindictiveness towards” other defendants.

Here, the court ruled Sonfield and Sonfield Jr. did not have standing because they were not shareholders of Aztec Oil. The court also found that Fisher and Livingston were not representative shareholders because they were majority shareholders of Aztec Oil and controlled 80% of the votes. The court concluded that the ownership made it "highly likely that Fisher and the entities he controls will pursue Fisher's own interests at the expense of all minority shareholders and evidencing a serious conflict of interests."   

Accordingly, the court granted Defendants’ motion to dismiss for Plaintiffs’ lack of standing.

The primary materials for this case may be found on the DU Corporate Governance website.

Aren Sharifi