Texas Supreme Court Removes Shareholder Oppression Remedies

On June 20, 2014, the Texas Supreme Court issued a decision making
carefully negotiated and drafted shareholder agreements a necessity for
minority shareholders. In Ritchie v. Rupe,
the Court ruled that no longer can minority shareholders of a closely held
corporation force the majority shareholders to buy-out their interest through a
claim of “oppressive” conduct. In the Ritchie
case, the Plaintiff claimed that by refusing to buy out the Plaintiff’s shares,
or even allow outside buyers to purchase the shares, the Majority were engaged
in “oppressive” conduct.

Under Texas Business and Organizations Code 11.404, a
receiver can be appointed to rehabilitate a domestic entity when “the actions
of the governing persons of the entity are illegal, oppressive, or fraudulent.”
Previous law held that a cause of action for oppression could be brought when
majority shareholders used their majority position to “freeze out” minority
shareholders, and Courts could force majority shareholders to buy out the
minority shareholders at a certain price. However, the Texas Supreme Court in Ritchie ruled that a claim for shareholder
oppression must show that the corporation’s directors or managers “abuse
their authority over the corporation with the intent to harm the interests of
one or more of the 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.

Therefore, a minority shareholder may prevail under this
definition only if the minority shareholder’s own interest is harmed and
the entity itself is harmed by such actions. The Court explicitly rejected a
common law tort for shareholder oppression including other remedies, such as a
buy-out remedy. The Court effectively acknowledged that sometimes the detriment
of minority interests can be for the benefit of the Company and allowable under
current law. Further, the Court ruled that when an action for oppression is
correctly brought, the statute allows only a one remedy: appointment of a
receiver to rehabilitate the company when necessary to protect the assets and
business from damage to parties at interest.

However, the Court clearly stated that other claims and
remedies are still available to protect minority shareholders.  Minority
shareholders may still bring derivative suits on behalf of the corporation for
breach of fiduciary duty, breach of contract, fraud, fraudulent transfer,
unjust enrichment, and quantum meruit, and other causes of action. However,
the Court removed the ability of minority shareholders to force the majority
shareholders to buy out their interest simply because they disapprove of how
the company is being managed.

Majority shareholders should take away from this
case that unless there is proof of harm, or significant risk of harm to the
corporation, or some other claim that can be brought by the company for
wrongful actions of a shareholder, then what is in the best interest of the
company is what majority shareholders should be concerned about. The takeaway for
both minority and majority shareholders should be to carefully consider,
negotiate, and agree to terms in shareholder agreements that layout the rights
and powers held by either majority or minority shareholders. Failure to
carefully consider such “what if” scenarios before they happen can
easily become a costly mistake for either side.