Texas Supreme Court Strikes Down Shareholder Oppression Cause of Action

This past summer the Texas Supreme Court in Richie v. Rupe,  2014 Tex. LEXIS 500 (Tex. 2014),  all but eliminated shareholder oppression as a cause of action available to minority shareholders in closely held corporations being treated unfairly by the majority.  The Court held that there is no common law cause of action for shareholder oppression.  Rather, it is simply one of several statutory grounds for a court to impose a receivership upon the operation of a corporation.

Unfortunately, by the time a corporation reaches the point of receivership it is usually a sinking ship. This is not much help to shareholders who are being taken advantage of by those in control of profitable corporations. Thus, for all practicable purposes this cause of action has been completely eliminated.

Up until the court's decision in Richie v. Rupe, supra, Texas courts had generally recognized a cause of action for shareholder oppression when the 'majority shareholders' conduct substantially defeated the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's  decision to join the venture; or conduct by the majority that was: burdensome, harsh, or wrongful; constituted a lack of probity and fair dealing in the company's affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder was entitled to rely.' (See Ritchie v. Rupe, 339 S.W.3d 275,  289 (Tex. App. - Dallas, 2011, pet. granted, reversed and remanded, 2014 Tex. LEXIS 500 (Tex., June 20, 2014)).

So, for example if the controlling shareholders fired the minority shareholder and reaped the benefits of the profits from the corporation by paying themselves higher salaries while paying the minority shareholder no dividends, the minority shareholder might have a cause of action for shareholder oppression.  If the minority shareholder prevailed, the court would in turn fashion an equitable remedy such as requiring the corporation to purchase the minority's shares for their fair market value. This will no longer be a possibility under the courts ruling.

However, all is not lost.  Minority shareholder may still be able to bring a cause of derivative action on behalf of the corporation against the controlling members for breach of fiduciary duty.  It just tends to be more difficult to prove.  Some may say this is a good day for corporations.  I would say this is not necessarily so.  It may now be more difficult for closely held corporations to raise capital by selling minority interests to investors.  As they say, be careful what you ask for, you might get it.

Texas Supreme Court to Address Shareholder Oppression

It is no secret that a majority of Texas corporations are privately held companies controlled by a small number of shareholders.  The controlling shareholders in these corporations may have a duty not to oppress the economic interests of the shareholders holding a minority interest. There are currently three cases pending before the Texas Supreme Court that will address the cause of action known as shareholder oppression. 

"Texas courts have generally recognized two non-exclusive definitions for shareholder oppression:

1. Majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture; or

2. Burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company's affairs to the
prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely." Ritchie v. Rupe, 339 S.W.3d 275, 288 (Tex. App. - Dallas 2011, pet. granted).

Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d (Tex. App. - Dallas 2012, pet. filed)

In this case the majority shareholder and minority shareholder were cardiac perfusionists who operated heart-lung machines during open-heart surgery.  One year after the formation of the corporation under which these services were performed, a 10% stake in the company was sold to the minority shareholder.  The shareholders entered into a buy-sell agreement that required the shareholders of the corporation to purchase the stock of another shareholder, at book value, upon termination of that shareholder's employment with the corporation. Six years later the minority shareholder's employment was terminated.  The majority shareholder sued to exercise his contractual right to purchase the minority shareholder's interest at book value. The minority shareholder counter-sued for shareholder oppression alleging that the majority shareholder utilized the corporation as his personal vehicle to pursue his own self interests and misused corporate funds.

The jury found that the majority shareholder suppressed payment of profit distributions to the minority shareholder; paid himself excessive compensation; improperly paid his family members; improperly paid his personal expenses using company funds; and used control of the company to lower the value of the minority shareholder's stock.  The jury found that the fair value of the minority's shares was $300,000.  The trial court found that the majority shareholder engaged in shareholder oppression and required him and the corporation to purchase the minority's shares at what the jury found to be the fair value - $300,000.  The court of appeals upheld the trial court verdict and this case may be ultimately decided by the Texas Supreme Court.

Ritchie v Rupe, 339 S.W.3d 275 (Tex. App. - Dallas 2011, pet. granted)

In this case, the primary complaint of the minority shareholder was that the majority shareholders refused to meet with potential buyers of the stock of the minority shareholder, making the minority's interest unmarketable.  The jury found in favor of the minority shareholder and the court ordered the corporation to buy the minority's shares at their fair market value.  The court of appeals affirmed and remanded the case to the trial court to make further determinations on the fair market value of the minority's shares, taking into account the discount of the value of the minority's interest based upon lack of marketability.  This case is now pending before the Texas Supreme Court for final review.

Argo Data Resource Corporation v Sharithaya, 380 S.W.3d 249 (Tex. App. - Dallas 2012, pet. filed)

The court of appeals reversed the trial court's judgment in favor of the minority shareholder on the minority's shareholder oppression claim, which was based, at least in part, on the payment of excessive compensation to the majority shareholder.  The trial court ordered the majority shareholder to require the corporation to pay an $85 mil. dividend as equitable relief for the majority's alleged oppressive conduct.  The court of appeals found there was insufficient evidence to support a finding of shareholder oppression and the case may ultimately be decided by the Texas Supreme Court.