2014 Fall Newsletter - Minority Shareholder
Minority Shareholder Oppression Suits Curbed by Texas Supreme Court
by Joshua Mermis
The Texas Supreme Court ruled in June 2014 that minority shareholders in private companies in Texas cannot sue for shareholder oppression, even when majority shareholders attempt to push them out of the business, dilute their shares, or otherwise act to lower the value of their investment.
The ruling in Ritchie v. Rupe, (Tex.2014) held that not only does the Texas Business Organizations Code not prohibit oppression of minority shareholders, there is no common-law cause of action for minority shareholder oppression in Texas. The ruling overrules intermediate appellate courts which had allowed such claims to be brought. The Court’s ruling means that except in very narrow circumstances minority shareholders cannot sue unless they can allege that the complained-of actions were fraudulent, a breach of fiduciary duty, or another cause of action other than shareholder oppression.
The facts in Ritchie v. Rupe involved a minority shareholder who inherited 18 percent of private company stock following the death of her husband. The majority shareholders had offered to purchase the shares for $1 million, but because the company had sales in excess of $150 million and assets in excess of $50 million, her attorney encouraged her to decline the “absurd” offer. Although the offer was ultimately raised to $1.7 million through negotiations, the minority shareholder continued to refuse what she believed was a too-low offer. She then found a third-party buyer to whom she wanted to sell the stock, but the majority shareholders objected and refused to meet with the potential third-party buyer for fear it would put the company at risk for securities fraud. This left the minority shareholder unable to market or monetize her shares. She sued, alleging that the majority shareholders engaged in “oppressive” conduct toward her. At trial, the company was ordered to purchase her shares at a jury-determined fair market value of $7.3 million. The majority shareholders appealed.
How does this decision affect you?
When drafting an Operating Agreement, the minority shareholder and its attorney should insist that a Shareholder Oppression Provision be included and that it is conspicuous. Such a provision could protect a minority shareholder when majority shareholders attempt to push them out of the business, dilute their shares, or otherwise act to lower the value of their investment.