Fair’s Fair

The court issued a significant ruling related to the remedy for shareholder oppression, holding that the equitable relief of a “fair value” buy-out was not precluded by a provision in an Agreement mandating a “book value” buy-out. Joubran, the sole shareholder of a cardiac perfusion company, hired Hughes, sold him 10% of the corporation’s outstanding shares, and entered into an Agreement requiring Joubran to purchase Hughes’s stock at book value upon the severance of his employment. Years later a dispute arose, Hughes was terminated, and Hughes sued Joubran for shareholder oppression. The trial court held that that Joubran engaged in shareholder oppression and awarded Hughes what the jury found to be the fair value of his shares in the company.

On appeal, Joubran argued that the trial court should have calculated the value of the shares based on their book value as required in the Agreement because a party to a contract generally cannot recover equitable relief inconsistent with that contract. But the court held that the trial court had the equitable power to order a buy-out at fair value because the book value of Hughes’s shares was reduced by Joubran’s oppressive conduct and, additionally, Hughes was not suing for breach of contract. This holding squares with the court’s recent decision in Ritchie v. Rupe that the “enterprise value” method for determining stock’s fair value, i.e. determining the pro rata value of each share without any discount based on the stock’s minority status or marketability, is appropriate in shareholder oppression suits when the oppressive conduct of the majority forces a minority shareholder to relinquish his ownership position. 339 S.W.3d 275, 289 (Tex. App.—Dallas 2011, pet. filed)

As a secondary issue, the court addressed whether a shareholder that exercises dominating control over a corporation owes a formal fiduciary duty to the minority shareholders. In its verdict, the jury found that no informal fiduciary duty existed between the shareholders, but nonetheless found that Joubran breached a fiduciary duty to Hughes and awarded Hughes almost $2 million in actual and exemplary damages. The trial court declined to render judgment in favor of Hughes, who argued on appeal that the trial court should have disregarded the first jury finding because, under the circumstances, Joubran owed Hughes a formal fiduciary duty. The court disagreed, citing numerous Texas cases to the contrary and noting that the Texas Supreme Court expressly declined to recognize such a duty in Willis v. Donnelly, 199 S.W.3d 262, 276 (Tex. 2006).

Cardiac Perfusion Services, Inc. v. Hughes, No. 05-10-00286-CV