Thursday, January 10, 2013

Shareholder Oppression in Texas

"I know it [hard-core pornography] when I see it ." -  Former United States Supreme Court Justice Potter Stewart

Just like Justice's Stewart's take on pornography, the legal doctrine of shareholder oppression in Texas has not been well defined.  Perhaps our lawmakers feel that a judge will "know it [shareholder oppression] when they see it."  It a very basic level, shareholder oppression occurs when a majority shareholder causes a corporation to take one or more corporate actions which are "unfair" to one or more minority shareholders.  Of course, by definition, minority shareholders do not have control of the decision-making of the corporation.  It is not usual for a minority shareholder to accuse a majority shareholder of oppression.  It is up to Texas courts to decide when a corporate decision that the minority shareholders don't like is fair, and when it is so unfair as to rise to the level of shareholder oppression.

Unfortunately, Texas case law has not given us much guidance on this issue.  Recently, the Dallas Court of Appeals decided the case of Ritchie v. Rupe.  That court identified "two non-exclusive definitions for shareholder oppression" under prior case law:

"1. majority shareholders' conduct that substantially defeats the minority's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join 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."

Ritchie v. Rupe has become the most important shareholder oppression case in Texas in many years because the Texas Supreme Court has agreed to hear an appeal of the Dallas court's decision.  That case involved a claim of shareholder oppression based upon the corporation's controlling shareholders instructing the corporation's management to refuse to meet with potential buyers for the minority shareholder's stock thereby making the minority stock extremely difficult to sell.

Texas corporate lawyers are watching this case closely.  The petition for review and other briefs for the Ritchie v. Rupe Texas Supreme Court case are available here.  You'll note several amicus briefs, including my favorite one written by Carol Bavousett Mattick, Chair of the Securities Law Committee of the Business Law Section of the Texas State Bar, which is available here.  Ms. Mattick noted in her brief that the most recent Texas Supreme Court opinion on shareholder oppression that the Dallas Court of Appeals was able to cite was a case from 1955 - before the Texas Business Corporation Act became effective!  The Texas Business Corporation Act was replaced by the current Texas Business Organization Code effective 2006.   

The Texas Supreme Court will hear oral arguments for the Ritchie v. Rupe case February 26, 2013 in Sherman, Texas.  The Texas business bar will be listening.

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