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.