Rights of a Texas Corporation's Minority Shareholder: More Limited Still
A minority shareholder of a closely held Texas corporation wanted out. She asked the corporation to buy her shares. In response, the corporation offered her a price that she believed inadequate. She asked the corporation to cooperate with her in selling her shares. In particular, she asked the corporation’s president to meet with a prospective buyer. The president declined to meet, citing advice of counsel. (Although the facts are more complicated this is the boiled-down essence.)
Stymied, she sued the directors, the other shareholders, and the corporation. She claimed she was being oppressed and asked the court to order the corporation to purchase her shares at fair market value -- or appoint a receiver to liquidate the corporation.
The Texas Supreme Court, in its 2014 landmark decision in the case Ritchie v. Rupe¹, held that Texas does not recognize a common law cause of action for shareholder oppression. The court also held that Texas' corporate rehabilitative receiver statute², which allows a Texas district court to appoint a receiver for a corporation under statutorily specified circumstances, does not provide a buyout remedy.
So the story seemed to end: the minority shareholder’s lawsuit was largely unsuccessful.
Moral of the story: a minority shareholder who wants a degree of control over future exit opportunities should bargain for those opportunities in a shareholders agreement, ideally in connection with purchasing his or her shares. (There is no free lunch in shareholder agreements, however: the minority shareholder’s additional rights and opportunities, etc. will nearly always be coupled with obligations.) Absent a shareholders agreement establishing exit opportunities, a minority shareholder of a closely held Texas corporation who “wants out” has few practical options.
So the story has an end and a moral. The lawsuit is over, right?
Well, not totally. Here’s the news: the Ritchie v. Rupe lawsuit now has a mini-sequel.
The Texas Supreme Court in its 2014 opinion remanded the case to resolve challenges to a jury finding that fiduciary duties to the minority shareholder had been breached. A Texas court of appeals reviewed that jury finding and, last month, reversed it – holding (1) there was no evidence of a relationship of trust and confidence among the parties and (2) that a relationship of that type is a prerequisite to a finding that an informal fiduciary relationship existed.³
No such relationship … then no fiduciary duty. And, no fiduciary duty … then of course no breach of that duty.
Interestingly, the trustee of one of the shareholders - who was one of the corporation’s directors - was an attorney who had represented the minority shareholder and her husband before the husband passed away. Not enough of a relationship, said the court of appeals, stating that “there is … no evidence of a confidential relationship between the [minority shareholder] and [the attorney] as shareholders.” (Emphasis added.)
The mini-sequel changes the moral of the story only a little: it’s still the situation of course that shareholders agreements can provide valuable future rights, options, and benefits, etc. The mini-sequel adds weight and clarity to the notion that a minority shareholder can’t always rely on relationships to create duties which provide the minority shareholder with a degree of legal protection. Although all of a closely held corporation’s shareholders may hope for - and benefit economically from - the corporation’s success, a minority shareholder with no shareholders agreement protections and no relationships with others involved in the corporation often has little beyond that hope.
Please feel free to contact me at 214-749-2406 with questions about the nature and extent of shareholder fiduciary duties or provisions that may be included in shareholders agreements to address the types of issues discussed in Ritchie v. Rupe.
¹ Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014).
²Section 11.404 of the Texas Business Organizations Code (formerly codified as Article 7.05 of the Texas Business Corporation Act).
³Ritchie v. Rupe, No. 05-08-00615-CV, 2016 BL 8316 (Tex. App. – Dallas, Jan. 12, 2016).
