Texas Supreme Court Refuses to Recognize a Common Law Claim for Shareholder Oppression

06/25/2014

In a significant decision affecting Texas corporate law, the Texas Supreme Court decided on June 20th there is no common law claim for shareholder oppression in Texas; the court also set the standards and remedies available for oppression claims brought pursuant to the rehabilitative receiver statute in the Texas Business Organizations Code. Several Texas intermediate courts of appeal had previously allowed shareholders to bring oppression claims, but the supreme court had never directly addressed oppression claims. By declining to recognize a common law claim, Texas law conforms to Delaware corporate law, which also does not recognize such a common law cause of action.

In the case, Ritchie v. Rupe, No. 11-0447, the supreme court reviewed an appeal from the Dallas Court of Appeals regarding whether a failure of representatives of a privately held corporation to meet with prospective buyers of a minority shareholder’s interest in the company constituted oppression. At the minority shareholder’s request, the company had previously made an offer to buy her shares for an amount she rejected as too low and had also met her requests for corporate information. However, based on advice of the company’s lawyers that the meeting might put the company at risk for securities fraud liability, the company representatives declined to meet with buyers proffered by the minority shareholder.

The minority shareholder then sued the company and its representatives alleging as the basis for claims of oppression and breach of fiduciary duty, among other things, the failure to meet with the prospective buyers. After trial, the trial court ordered that the company buy the minority shareholder’s interest for more than $7 million as the remedy for the alleged oppression. In so doing, the trial court considered both a “fair dealing” test (submitted to the jury) and a “reasonable expectation” test. The share buyout valuation did not include any discounts for marketability or lack of control. The Dallas Court of Appeals upheld the oppression finding but remanded to the trial court to apply discounts to reduce the buyout remedy from the interest’s alleged “fair value” to its “fair market value.”

Upon reviewing the claim, the supreme court determined there is a statutory claim for oppression under the Texas rehabilitative receivership statute for corporations, Texas Business Organizations Code section 11.404; however, the court limited the available relief to appointment of a rehabilitative receiver and adopted standards for “oppressive” conduct higher than the “fair dealing” and “reasonable expectations” tests previously used by the lower courts.

Under the new standard, oppression occurs only if a corporation’s directors or managers “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.” In arriving at this standard, the court reviewed the purposes of the receivership and other statutes and noted that oppression always included the abuse of power that harms the interests of another person in a way that disserves the authorization of such power, that the statute was only to allow a temporary receivership to relieve exigent circumstances, and that all of the possible grounds for a receivership posed a serious risk of harm to the corporation. The court also held that the statute contemplates that the “business judgment” rule be considered in a claim for oppression. The court held that the cases that had applied only a “fair dealing” or “reasonable expectations” test did not comport with those statutory requirements. The court concluded that the refusal to meet with potential buyers in Rupe did not constitute oppressive action.

In addition, the court held that a temporary rehabilitative receivership cannot be appointed unless a trial court has determined that all other lesser available remedies based on other claims or other provisions of the statute would not be adequate. In Rupe, the court noted that the minority shareholder had not requested a rehabilitative receivership or shown that lesser remedies would not be sufficient based on other successful claims. The court rejected the argument that the statute allowed lesser remedies other than a short term, rehabilitative receivership.

The court then examined whether Texas should recognize a common law claim for shareholder oppression, applying a cost-benefit analysis. In particular, the court reviewed the various forms of conduct often alleged in oppression claims, including the denial of access to books and records, the withholding of dividends, termination of employment, misapplication of funds, diversion of corporate opportunities, and manipulation of stock price. For each of these types of wrongs, the court found that other available causes of action adequately addressed the wrongdoing and no additional cause of action was necessary to protect minority shareholders’ interests.

The court sent the case back to the Dallas Court of Appeals to review whether Rupe’s claim for alleged breach of an informal fiduciary duty was appropriate and, if so, whether the buyout order at a reduced price was an appropriate remedy.

Two other shareholder oppression cases are before the court for it to decide whether or not they should be reviewed: Shagrithaya v. ARGO Data Resource Corp., No. 12-1012 (in which Haynes and Boone represents ARGO), and Cardiac Perfusion Servs, Inc. v. Hughes, No. 13-0014.

For more information, please contact one of the attorneys below.

David H. Harper
214.651.5247
david.harper@haynesboone.com

Carrie L. Huff
214.651.5509
carrie.huff@haynesboone.com

Patrick D. Keating
214.651.5369
patrick.keating@haynesboone.com

 

Karen S. Precella
817.347.6620
karen.precella@haynesboone.com

 

 

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