(1)
There is no common law cause of action for “minority shareholder
oppression” in Texas;
(2)
While shareholder oppression can be asserted under
Texas’s court-appointed rehabilitative receivership statute (Section 11.404 of
the Texas Business Organizations Code), receivership is the sole remedy for
such shareholder oppression (not a buy-out of the minority shareholder being
oppressed); and
(3)
The definition of shareholder oppression under the
receivership statute is very narrow – it requires that the directors “abuse
their authority over the corporation with the intent to harm the interests of one
or more shareholders, in a manner that does not comport with the honest
exercise of their business judgment, and by doing so create a serious risk of
harm to the corporation.”
The facts of the Ritchie
v. Rupe case involved alleged oppression of an 18% shareholder of a privately
held Texas corporation because the majority shareholders who controlled the corporation,
among other things, (i) offered to buy out the minority shareholder at a price
representing a significant discount to the shares’ fair market value, and (ii)
refused to meet and exchange information about the corporation with other
potential buyers of the minority shareholder’s shares, thereby making the
shares virtually impossible to sell as a practical matter. The lower courts determined that the facts
supported a claim for minority shareholder oppression and required the corporation’s
majority shareholder to purchase the minority shareholder’s shares for a redemption
price of $7.3 million. The Texas Supreme
Court reversed that ruling on the basis described above, but it left open the
possibility that the minority shareholder might still pursue a potential claim against
the controlling shareholder for breach of fiduciary duty.
The Ritchie v. Rupe
case overturned several lower court opinions and opinions in other states which
generally allowed claims for shareholder oppression merely if the majority
shareholder’s conduct either (1) substantially defeats the minority shareholder’s
reasonable expectations in joining the company (the “reasonable expectations”
test), or (2) (i) is “burdensome, harsh and wrongful,” (ii) involves “a lack of
probity and fair dealing in the affairs of a company to the prejudice of some
of its members,” or (iii) involves “a visible departure from the standards of
fair dealing and [fair play]” (the “fair dealing” test).
The bottom line is that it is now much more difficult for a Texas
minority shareholder to successfully bring shareholder oppression claims in
Texas.
The take-away is that now it is even more important than
ever for shareholders of privately held companies (especially minority
shareholders) to enter into shareholder agreements to protect their rights and
to provide for a contractual mechanism for a shareholder to exit the company.
