7 Claims To Consider When Bringing A Shareholder Oppression Action In Texas

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Investors should seek counsel prior to entering into any agreement in Texas involving a minority business interest, an ownership position with fewer remedies available should problems arise with management than in years past.

For 25 years courts of appeals in Texas recognized numerous equitable remedies, including a court-ordered buyout, when a minority shareholder established that the majority shareholder engaged in “oppressive” conduct.  However, in a landmark 6-3 opinion in 2014, the Texas Supreme Court disapproved of the manner in which courts of appeals had been applying the oppression doctrine and significantly limited its reach.

In Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), the court:

(1) rejected the “reasonable expectations” and “fair dealing” tests for oppression that courts of appeals had been applying in Texas since 1988 and adopted a definition requiring abuse of authority by management with intent to harm an owner in disregard of management’s honest business judgment;

(2) held that a rehabilitative receivership is the only remedy for oppression under Section 11.404 of the Business Organizations Code, and

(3) declined to recognize a common-law cause of action for oppression.

The majority in Ritchie v. Rupe discussed at length the policy reasons for its decision and “the adequacy of remedies that already exist.”

Today, the strategies that should be considered by minority owners aggrieved by a majority owner’s conduct in Texas with respect to the entity are:

  • Characterize, where possible, the majority’s conduct as a breach of fiduciary duty to the entity:
  • Seek damages or rely on equitable principles to recover a disgorgement remedy, court ordered dividends, or other injunctive relief for a breach of fiduciary duty to the entity based on improper benefit by the majority even if damages to the corporation or LLC cannot be shown; and
  • Rely on the statutory provisions governing derivative suits involving closely held corporations and LLCs to recover directly for the breach of fiduciary duty to the entity (in contrast to the traditional result in a derivative suit where the recovery is paid to the entity).
  • Establish the existence of an informal fiduciary duty owed by the majority to the minority based on a special relationship and pursue legal or equitable remedies, possibly including a court-ordered buyout.
  • Characterize the majority’s conduct as grounds for a rehabilitating receivership or judicially decreed winding up.
  • Characterize the majority’s conduct as a breach of contract between the minority owner and the entity or majority.
  • Characterize the majority’s conduct as fraudulent.

In addition, minority shareholders in some cases may be able to avail themselves of one or more of the following causes of action: an accounting, conversion, fraudulent transfer, conspiracy, unjust enrichment, and quantum meruit. See Ritchie v. Rupe, 443 S.W.3d at 882 (listing these among various causes of action asserted by minority shareholders in prior cases to redress the same conduct on which oppression claims were based).

While there are potential remedies available, the Ritchie case has narrowed the road to recovery in Texas for shareholder oppression claims by minority interest owners.