A minority shareholder in a small, privately-held corporation is often vulnerable to being strong-armed by the majority owner or owners. For example, a majority contingent might deny a minority owner access to corporate books and records, withhold or refuse to pay dividends over the minority’s objection, terminate a minority shareholder’s employment with the corporation, or manipulate stock values in order to obtain the minority’s shares for less than their true worth.
Until recently, if the majority shareholders’ conduct was egregious enough to qualify as “oppressive,” a minority shareholder could sue the individual shareholders for “minority shareholder oppression,” and recover damages caused by the majority’s actions. Historically, the minority owner could recover for damages caused by this conduct, even if it didn’t harm the corporation itself. The cases recognizing a minority owner’s right to recover for “oppression” generally applied one of two legal definitions of the term:
1. Majority shareholders’ conduct that substantially defeats the minority’s expectations that, when objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to joint the venture; or
2. Burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely.
On June 20, 2014, the Texas Supreme Court handed down its decision in Ritchie v. Rupe, which did away with these definitions of “oppression.” The Court reasoned that Texas courts don’t need to use these broad and vague definitions because a minority owner’s interests are already sufficiently protected by other statutory and court-created rights.
For example, Texas Business Organizations Code § 21.218 establishes a shareholder’s statutory right to inspect the corporation’s books and records, and § 21.222 allows the minority shareholder to recover his attorney’s fees incurred in enforcing his inspection right. Similarly, Texas Business Organizations Code § 21.354 allows a minority shareholder to force an independent appraisal of the value of his stock before the majority can cancel and liquidate his shares in a cash-out merger. Further, a minority shareholder may sue and recover for breach of contract when a majority owner fails to honor a company agreement or other contract establishing the owners’ rights and obligations with respect to the company’s business. If a majority owner acting as an officer or director abuses his position and harms the corporation, a minority owner may sue the officer or director for breach of fiduciary duty in a “derivative suit” brought on the corporation’s behalf. Other common law remedies still available to minority owners in certain situations include fraud, conversion, and unjust enrichment.
Ritchie’s biggest impact will likely be in circumstances where a majority owner manipulates the corporation to the detriment of the minority owner, but does not harm the corporation. For example, a majority owner might repress dividends to all shareholders, knowing the minority is depending on them. Because this conduct is not prohibited by other law, the fact that it hurts the minority will not, on its own, make it actionable. If the minority owner can prove that he or she has a pre-existing relationship of trust and confidence with the majority owner, the minority owner may be able to maintain a common law breach of fiduciary duty claim. However, these “informal” fiduciary relationships are only recognized on a case-by-case basis, and represent exceptions to the normal rule that majority owners do not owe a fiduciary duty to minority owners. Courts will be more likely to find such informal fiduciary relationships between owners of family businesses than between business colleagues working together at arms-length.
Some of the potential pitfalls of Ritchie may be avoided by contracting around them. Majority and minority shareholders have always been, and continue to be free to determine their respective rights, obligations, and duties in a carefully-crafted company agreement.
Of course, this is not an exhaustive discussion of the law applicable to these issues. For more information on this topic, please email Clint Twaddell, trial lawyer with BRANSCOMB LAW. His contact information is email@example.com or (512) 735-7800.