Fiduciary Duties and Minority Shareholder Oppression from the Defense Perspective: Differing Approaches in Texas, Delaware, and Nevada


Suits by minority shareholders in Texas are on the rise and represent an expanding, cutting-edge area of civil litigation in this state and across the country. While the Texas Supreme Court and several appellate courts in Texas have yet to recognize a cause of action for shareholder oppression or to define its parameters, a growing number of courts have upheld claims for shareholder oppression or at least recognized it as a viable claim. But these courts’ justifications for recognizing a broad shareholder oppression claim are questionable, because they rely on: (1) a Texas Supreme Court case that never blessed shareholder oppression as a valid claim, (2) a Texas receivership statute that allows relief from oppression only in limited and extreme circumstances, and (3) a Texas appellate court case that relied on the previous two faulty grounds and on inapplicable case law from other jurisdictions. Given this weak foundation, it is doubtful whether the Texas Supreme Court will recognize a claim for shareholder oppression beyond the purview of the receivership statute, if and when it confronts the issue.

Given the paucity of Texas precedent in the area of shareholder oppression, Texas courts often look to Delaware law for guidance on business issues, given the specialized nature of Delaware courts considering business disputes. In addition, because of the “Internal Affairs Doctrine,” Delaware law can apply to a suit filed in Texas if the corporation or LLC is chartered in Delaware. The Texas practitioner must be familiar with the differences between Texas and Delaware law, and the circumstances that can trigger the application of Delaware rather than Texas substantive law.

This paper first addresses fiduciary duty requirements in Texas and Delaware, and the mechanisms available under the “Internal Affairs Doctrine” that may mandate the application of anotherstate’s law instead of Texas’ in the context of fiduciary and shareholder litigation. There follows a discussion of Texas law on the evolving legal theory of “Minority Shareholder Oppression.” As will be seen, unlike the broad and amorphous formulation of the doctrine some Texas Courts of Appeals have adopted (absent meaningful guidance so far from the state’s supreme court), Delaware has rejected the Texas lower courts’ approach of adopting a vague and general, almost standard-less cause of action called “shareholder oppression,” in favor of a case-specific approach designed to protect minority shareholders in limited circumstances, such as squeeze-out mergers and freeze-outs. Delaware courts do this mostly through the way they interpret fiduciary and disclosure duties as well as minority shareholder appraisal rights. Finally, this paper concludes with a brief analysis of minority shareholder oppression in Nevada, a state that is seen as an increasingly attractive alternative forum for incorporation.

Excerpted from a presentation to the 2012 Securities Regulation and Business Law Conference, February 9-10, 2012, Dallas Texas. To read the full paper, click on the PDF linked below.

PDF - Minority_Shareholder_Oppression_Young.pdf

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