Shareholder Oppression in Texas

Texas LawIn Texas, the elephant in the room is Ritchie v. Rupe, 443 S.W.3d. 856 (Tex. 2014), where an anti-plaintiff majority of the Texas Supreme Court declined to recognize the widely-accepted common law cause of action for minority shareholder oppression in closely held corporations. (See the scholarly comment by James Dawson, Ritchie v. Rupe and the Future of Shareholder Oppression, 124 YALE L.J.F. 89 2014). Notwithstanding this “bad law” and reversal in protection against abuses of minority shareholders, as we like to say in Texas, there is more than one way to rope a steer. As announced by the Court, a statutory and derivative cause of action for shareholder oppression--the appointment of a rehabilitative receiver--is still available where majority shareholders “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.” Ritchie v. Rupe, 443 S.W.3d. at 871.

The majority Court also reviewed the statutory and direct cause of action for denial of access to corporate books and records as well as multiple common law causes of action that may be brought derivatively on behalf of the corporation in litigation involving closely held corporations: (1) an accounting, (2) breach of fiduciary duty, (3) breach of contract, (4) fraud and constructive fraud, (5) conversion, (6) fraudulent transfer, (7) conspiracy, (8) unjust enrichment, (9) quantum meruit, (10) withholding or refusing to declare (or failure to declare higher) dividends, (11) unlawful termination of employment in extreme circumstances, (12) misapplication of corporate funds and assets, (13) diversion (usurpation) of corporate opportunities, and (14) manipulation of corporate share values.

In a well-considered dissenting opinion, it is pointed out that thirty-one states have statutes that permit courts to appoint a receiver to liquidate a corporation based on shareholder oppression:

Ala. Code § 10–2A–1430; Ark. Code § 4–27–1430; Colo. Rev. Stat. § 7–114–301; Conn. Gen. Stat. § 33–896; Ga. Code § 14–2–940; Idaho Code § 30–1–1430; 805 Ill. Comp. Stat. 5/12.55; Iowa Code § 490.1430; Md. Code, Corps. & Ass'ns § 3–413; Mich. Comp. Laws § 450.1489; Miss. Code § 79–4–14.30; Mo. Ann. Stat. § 351.494; Mont. Code § 35–1–938; Neb. Rev. Stat. § 21–2985; N.H. Rev. Stat. § 293–A:14.30; N.J. Stat. § 14A:12–7; N.M. Stat. § 53–16–16; N.Y. Bus. Corp. Law § 1104–a; Or. Rev. Stat. § 60.661; 15 Pa. Stat. § 1981; R.I. Gen. Laws § 7–1.2–1314; S.C. Code § 33–14–300; S.D. Codified Laws § 47–1A–1430; Tenn. Code § 48–24–301; Utah Code § 16–10a–1430; Vt. Stat. tit. 11A, § 14.30; Va. Code § 13.1–747; Wash. Rev. Code § 23B.14.300; W. Va. Code § 31D–14–1430; Wis. Stat. § 180.1430; Wyo. Stat. § 17–16–1430.

Ritchie v. Rupe, 443 S.W.3d. at 894, n.12.

And another four states allow liquidation for similar actions amounting to “persistent unfairness” or “unfairly prejudicial” conduct.

Alaska Stat. § 10.06.628; Cal. Corp. Code § 1800; Minn. Stat. § 302A.751; N.D. Cent. Code § 10–19.1–115.

Ritchie v. Rupe, 443 S.W.3d. at 895, n.13.

North Carolina has even broader language for authorizing liquidation if “reasonably necessary for the protection of the rights or interests of the complaining shareholder.

” N.C. Gen. Stat. § 55–14–30(2)(ii).

Ritchie v. Rupe, 443 S.W.3d. at 895, n.14.

Justice Guzman, the author of the Ritchie v. Rupe dissenting opinion, further noted:

“Unsurprisingly, the seminal Texas case on the issue has likewise agreed with this authority [Patton v. Nicholas, 154 Tex. 385, 279 S.W.2d 848 (1955)] in recognizing the availability of a buyout under our oppression statute that expresses a preference for the use of lesser legal and equitable remedies. Davis v. Sheerin, 754 S.W.2d 375, 380 (Tex.App.—Houston [1st Dist.] 1988, writ denied) (“Texas courts, under their general equity power, may decree a [buyout] in an appropriate case....”).

Importantly, I am aware of no state that has interpreted their shareholder oppression statute as foreclosing all remedies except receivership, as the Court does today. Indeed, other state supreme courts have cited this Court's precedent for the proposition that “[m]ost states have adopted the view that a dissolution statute does not provide the exclusive remedy for injured shareholders and that the courts have equitable powers to fashion appropriate remedies where the majority shareholders have breached their fiduciary duty to the minority by engaging in oppressive conduct.” (footnote omitted).

Ritchie v. Rupe, 443 S.W.3d. at 898-99.

It is also important to note that there are two very practical and useful statutory remedies that may be effectively employed in litigation by the aggrieved minority shareholder in Texas.  First, “[i]f justice requires, (1) a derivative proceeding brought by a shareholder of a closely held corporation may be treated by a court as a direct action brought by the shareholder for the shareholder's own benefit; and (2) a recovery in a direct or derivative proceeding by a shareholder may be paid directly to the plaintiff….” Tex. Bus. Orgs. Code §21.563(c)(1)(2).  Second, on termination of a derivative proceeding, the court may order the corporation to pay the reasonable expenses of the plaintiff incurred in the proceeding, including attorney’s fees and costs in pursuing an investigation of the matter that was the subject of the proceeding, if the court finds that the proceeding has resulted in a substantial benefit to the corporation. Tex. Bus. Orgs. Code §21.561(a)(1)(2)(b)(1).