Does Shareholder Oppression Still Exist?

This morning’s decision by the Texas Supreme Court in Ritchie v. Rupe raises some pretty substantial questions about the continuing viability of claims for minority shareholder oppression in Texas. By way of background, the decision arises out of a dispute over a family-owned investment business, with the wife and heir of one of the deceased owners claiming that the other owners were hostile to her and told her that she would “never get any money in this family.” Wanting out of the company, she sought to sell her shares to an outside investor, but the majority shareholders refused to meet with any prospective purchasers, make the company’s records available, or otherwise assist in a sale. The jury found that conduct to be oppressive, and the trial court ordered a buyout of the minority’s shares for $7.3 million. The Dallas Court of Appeals affirmed the oppression ruling, albeit with a remand for further consideration of the valuation of the plaintiff’s shares.

In reversing that decision, Justice Boyd’s majority opinion for the Supreme Court first analyzed the case under the receivership statute, currently codified at section 11.404 of the Texas Business Organizations Code. That statute permits a court to appoint a receiver when “the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent . . .” Construing and rejecting previous cases that have considered the meaning of “oppressive” conduct, the court today holds that directors or managers engage in oppressive conduct “when they 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 they create a serious risk of harm to the corporation” (emphasis added). Since shareholder oppression cases have typically focused on whether the minority shareholder has been improperly harmed, the additional question of whether the majority is putting the corporation itself at risk of harm appears to be a significant shift in the law. Because the directors here had legitimate business reasons for refusing to meet with prospective buyers, there was no “serious risk of harm to the corporation,” and therefore no oppression.

Perhaps even more significant are the Supreme Court’s other two holdings in the case. Besides the refusal to cooperate with the sale of her shares, the plaintiff also alleged that the defendants had engaged in other types of oppressive conduct. The court declined to consider those other acts, however, based on its determination that the receivership statute does not authorize the remedy of a buyout of the minority’s shares. Thus, a court may order the appointment of a receiver if the corporation itself is threatened with harm, but it cannot order a buyout just because the minority shareholder is being harmed by the majority’s business decisions. Finally, because the receivership statute does not permit a buyout, the court turned to the question of whether there is a common law cause of action (and remedy) for shareholder oppression, and concluded that there is not. Although the court recognized there Texas law should protect minority shareholders from “freeze-out” or “squeeze out” tactics of the majority, it held that there are already sufficient protections with remedies such as derivative lawsuits, shareholder agreements, and common law claims such as breach of fiduciary duty and accounting. Accordingly, there was no need to recognize a common law claim for minority shareholder oppression, and it therefore could not serve as the basis to order an equitable buyout of the minority’s shares. And in fact, the Supreme Court remanded the case for further consideration of the plaintiff’s breach of fiduciary duty claim.

Going forward, the majority opinion today imposes significant restraints on shareholder oppression claims, refocusing the claim on harm suffered by the company rather than its minority shareholders and eliminating the ability of courts to order buyouts, whether at fair market value or any other price. Lawyers and clients should also make careful note of the majority’s emphasis on the utility of shareholder agreements in providing for the kinds of contractual remedies that can provide in advance for buyout provisions and other remedies that would moot the need for any shareholder oppression claim. But as Justice Guzman’s dissent correctly notes, this is a decision that puts minority shareholders in a much weakened position when their personal interests clash with the decisions of the majority.