Sweeping Changes on the Horizon: Fiduciary Duty of Employers & Others Managing 401K Plans

The statute governing the conduct of plan sponsors and advisors to 401(k) plans is the Employee Retirement Income Security Act of 1974 (ERISA).  Section 404 of ERISA imposes a prudent man standard of care on the employer and other plan fiduciaries, comprised of five standards:

  • Duty of Loyalty – A fiduciary must discharge his duties solely in the interest of the plan participants. This means the fiduciary must avoid conflicts of interest when managing plan assets.
  • Exclusive Purpose Rule – A fiduciary must discharge his duties for the exclusive purpose of providing benefits or defraying reasonable expenses only. The plan must not pay excessive compensation to its investment and service providers.
  • Duty of Care – A fiduciary must discharge his duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. This is also known as the “prudent expert” standard.
  • Duty to Diversify – A fiduciary must diversify the plan’s investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
  • Duty of Obedience – A fiduciary must discharge his duties in accordance with the documents and instruments governing the plan insofar as they are consistent with ERISA.

ERISA in § 1113(1) provides that claims brought against fiduciaries under the Act must be brought within six years from the initial breach.

On February 24, 2015, the U.S. Supreme Court heard oral arguments in the case of Tibble vs. Edison International.  This was the first case involving litigation over excessive 401(k) fees heard by the Supreme Court.

The Plaintiffs sued Edison International (Edison) in the U.S. District Court for the Central District of California (district court) to recover losses from alleged breach of fiduciary duty in management of their 401(k) plan based on two theories: 1) that Edison violated certain ERISA provisions by participating in revenue sharing with the funds to offset plan costs (essentially using a portion of the revenue from the participants’ funds to pay administration costs); and 2) that Edison violated ERISA provisions by imprudent handling of plan investments.

The district court granted summary judgment for Edison noting that Edison initially chose the higher-fee retail-class mutual funds for plan investments more than six years before the claim resulting in the plaintiffs’ claim being barred by the ERISA limitations period.

On appeal to the Ninth Circuit, Tibble counsel argued a continuing violation theory proposing that Edison continually breached their duty of prudence by failing to identify on an ongoing basis alternative lower cost fund options for plan participants through 2007.  If this theory was accepted, the last breach would have been in 2007 resulting in plaintiffs’ claims falling within ERISA’s six-year statute of limitations.  The Ninth Circuit affirmed the district court’s ruling.  Tibble petitioned the Supreme Court which granted certiorari to review the case.

While the underlying claim asserts that Edison breached its fiduciary duty in the management of the employee 401(k) Savings Plan, a defined contribution plan sponsored by Edison, the Supreme Court limited review to the limitations issue.

Edison initially claimed it had no continuous duty, and those claims were barred by the six-year statute of limitations, but at oral argument both sides agreed that the duty to monitor was a continuing one. They disagreed on the scope of that duty.  Edison International contended it had no obligation to switch to the less expensive share class, because this was not the type of issue significant enough to warrant “full due diligence.”  The position of the plan participants was that Edison International, as a fiduciary for the plan, had an obligation to make changes that any prudent investor would, which included switching to the lower-fee share class, as part of its continuing duty to monitor investment options.

In response to Justice Kagan’s question as to what a trustee is supposed to do under the prudent person’s standard, Tibble counsel advanced a three-part standard: 1) look at performance on a regular basis, a periodic basis; 2) look at the expenses and determine if there is a cheaper way to get the same investment for less money that’s coming out of the beneficiaries’ assets; and 3) has there been an alteration in the fund management that one ought to look further into.

On the other hand, Edison counsel argued that ongoing, periodic monitoring for anything other than more significant changes such as change in value and risks of the investments is not required.  In response to his contention that all of the changes required to sell retail shares and buy new institutional shares creates disruptions that employees don’t like which is why the monitoring process is usually limited to looking for significant changes.  Justice Kagan was rather incredulous at this proposition by Edison when she observed that, for people who have invested in funds for 30 to 40 years, this would not be much of a disruption at all.  At another point in oral argument, Justice Roberts chimed in questioning how there could be investor confusion.  Justice Roberts proposed that one sentence saying we have been paying .3 percent, and by changing funds, now we’re paying .2 percent, will not have people running out screaming that they’re confused about it.  Justice Kagan responded again with incredulity challenging Edison counsel “They don’t like changes.  They would rather have fees?”

Edison counsel also suggested that all that should be required of the prudent trustee is a periodic review to look only for changed circumstances.  He argued against the Supreme Court endorsing Tibble counsel’s position that the prudent trustee should also look and scour the market for cheaper investment options.  Interestingly, Justice Kennedy seemed to be endorsing the Tibble position when he responded that you certainly would scour the market for cheaper investment options if that’s what a prudent trustee would do.

The Justices focused much of their questioning first as to what kind of monitoring Tibble’s counsel was proposing, what kind of standard he was suggesting.  Then they looked to whether that was what a prudent trustee would do, and what kind of burden this would create for Edison in managing the plan, and finally what effect it would have on the plan participants.

The Justices appeared to support the Tibble plaintiffs’ new “prudent” investor standard.  This Supreme Court was also urged by the government attorneys from the Labor Department to accept this new standard as well.  If the high court adopts this new standard, which appears likely, it could have sweeping effects on companies and employees.  According to the Investment Company Institute, 401(k) plans held $4.4 trillion in retirement assets as of March, 2014.  Some of the funds offered to Edison employees had fees 37% higher than comparable institutional funds.

The Supreme Court’s decision is expected to be out sometime this summer.  It could change how companies fundamentally handle the way they invest for 401(k) plans.  They could move away from mutual funds to lower-cost methods such as collective trusts or separately managed accounts.  One option would be to appoint a “3(38)” fiduciary under ERISA, typically a registered investment advisor (RIA), to transfer the responsibility for managing the plans from themselves to the RIA.  Aside from potential changes in how such plans are managed, there is a lot at stake for both employers and employees in terms of potential litigation.  The Supreme Court’s decision could open a floodgate of litigation regarding the fiduciary duties of trustees for 401(k) plans sponsored by companies across the nation.  This is definitely one decision to keep on your radar.

References

Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of 5 U.S.C., 18 U.S.C., 26 U.S.C., 29 U.S.C., and 42 U.S.C.).

Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1113(1).

Tibble v. Edison International, 711 F. 3d. 1061 (9th Cir. 2013), cert. granted in part, 2014 U.S. LEXIS 4901 (U.S. Oct 2, 2014).

Too Many Working Women Still Plagued By Sexual Harassment

Although record numbers of American women have joined the workforce during the past fifty years, far too many of them are still being sexually harassed. In fact, roughly 7,200 new charges of sexual harassment are filed each year (only 17% of which are filed by males).

All of these victims are entitled to justice and most hope their cases will help curb this epidemic. During recent years, it’s been estimated that about one-fourth of all women have been sexually harassed at work. Far too many have also been assaulted on the job – and some even partially blamed for the horrific offenses committed against them.

This creates a terrible burden on women who must not only birth all children – they must also often join the full-time workforce — because so many American couples cannot afford to live on just one spouse’s paycheck, especially when children are involved.

Equal Employment Opportunity Commission (EEOC) Definition of Sexual Harassment  

Everyone seeking to file a federal lawsuit alleging sexual harassment (under Title VII of the Civil Rights Act of 1964) must first file an EEOC claim. However, the time period in which to file an EEOC claim is extremely short. If one misses the deadline, all further claims are barred.Therefore, it’s important to review how this agency defines this type of abuse. The EEOC says, “It is unlawful to harass a person (an applicant or employee) because of that person’s sex. Harassment can include ‘sexual harassment’ or unwelcome sexual advances, requests for sexual favors, and other verbal or physical harassment of a sexual nature.”

Critical Facts, Theories, and Statistics: Sexual Harassment of Women in the Workplace

  • Identity of the harasser. This can be your own supervisor, one from a different area, an employer’s agent, a co-worker – or even a non-employee;
  • Legally forbidden behaviors. This can include being asked for sexual favors, being physically touched in an unwanted (sexual) way, or other types of unsolicited sexual advances;
  • Hostile or offensive work environment. If you are forced to endure any of these types of behaviors and they “unreasonably interfere with your work performance or create an intimidating, hostile or offensive work environment, then . . . [they may constitute] sexual harassment;”
  • Lower-wage females especially vulnerable. The less a woman earns on the job, the more likely she is supervised in a way that may weaken her opportunities to report or file a successful EEOC claim for sexual harassment;
  • A number of workplace experts see declining judicial support for women who file sexual harassment claims. Some recent U. S. Supreme Court decisions imply that “big business” receives sympathetic help from the courts;
  • Too many employers fail to provide effective training that forbids sexual harassment. Not only does this greatly increase the likelihood of harassment – it also subjects these employers to more successful plaintiff lawsuits. Igonorance is not bliss. In addition to such training, employers need to create “an effective complaint or grievance process and [take] immediate and appropriate action when an employee complains;”
  • Women working in the military – as well as in the fields of high-tech and science. Sadly, these hard-working and highly intelligent women face unusually high incidences of both sexual harassment – and assault — due to their special talents and unique jobs once largely held by men;

How Our Office Helps Women Seeking to File Sexual Harassment Lawsuits

One of our attorneys will meet with you in a free, initial consultation and listen confidentially as you discuss the facts of your case. If necessary, we can help you prepare your EEOC filing, fully investigate your case, and then file your lawsuit in the appropriate federal court.

We always provide our services in as sensitive a manner as possible and understand the type of trauma most women experience regarding sexual harassment. Our firm will also explain to you how different stages of your case will most likely unfold while we prepare your case for trial. You can rest assured that we will do everything we can to succeed on your behalf.

Guidance for Sale of a Business

Business owners will all, at some point, face the challenge of selling their business. Whether the change comes as a result of reaching retirement age or the fact that you have grown your business to the extent that a third party chooses to acquire it, the general process remains the same. The business owner may wish to consult with one or more of the following professionals for guidance: business broker, accountant, and/or attorney.

First, most purchasers prefer to buy assets and few, if any, liabilities of your company.  This structure gives the buyer a fresh start, decreases the buyer’s risks because contingent liabilities are excluded, and results in a stepped-up basis in those assets for tax purposes. On the other hand, asset sales typically require obtaining the consent of a number of third parties, such as lessors, lenders, and supply vendors. Almost every contract to which a business owner is a party will contain an anti-assignment clause. Even if the assignment of a contract is permitted, you must obtain the prior written consent of the other party. A due diligence review of all contracts will be necessary to ascertain their assignability. Adding these additional parties to the mix, not only lengthens the time frame to reach closing, but also may place the seller in a weaker bargaining position, if the buyer wants changes made to the contracts. Other drawbacks to the asset purchase structure from the seller’s perspective include: titled assets must each be individually re-titled (e.g., real property, vehicles, and intellectual property such as patents and trademarks); seller’s guarantees must be removed or replaced; and the parties must resolve their conflicting views on how to allocate the purchase price among the assets and the seller’s personal goodwill.

Sellers normally prefer to structure the sale of their business as a direct transfer of some or all of their ownership interests. Since the entity owning the business remains the same, the assignability issue is avoided, unless the contract contains a “change in control” provision. The assets so acquired will have a “carryover” tax basis. Moreover, an ownership interest transfer could potentially require compliance with state and federal securities laws, so the buyer will need to find an exemption to such laws or even obtain a legal opinion that the ownership interests in your business do not constitute a “security.” A “stock” buyer will need to perform a more in depth due diligence review of your business because the buyer will be assuming your liabilities too. A compromise position is for the seller to indemnify the buyer for liabilities associated with actions or inactions that occurred prior to the closing date. To make such a compromise feasible, a portion of the purchase price may have to be escrowed to secure such contingent liabilities or the seller may be forced to personally guarantee those potential liabilities.

Once the acquisition transaction structure has been determined, both buyer and seller will delve into relevant confidential information concerning the other party to evaluate the desirability of completing the transaction. Generally, the buyer will need substantially more detailed information than the seller, especially if the seller is receiving the purchase price in cash. However, if the seller will receive his or her compensation in the form of an ownership interest in the buyer, both parties will want extensive information about the other. A checklist of the categories of information that the parties should review is set forth below.

  • Organization documents for the entity, together with all amendments
  • Financial statements, audit letters and tax returns
  • Books and records of the entity
  • Major contracts
  • Real property deeds and/or leases
  • Pending or threatened litigation
  • Governmental compliance & permit requirements
  • Major customers and suppliers
  • Employment terms for employees that will be retained
  • Intellectual property rights
  • Environmental issues
  • Lien searches for counties and states where entity does business
  • Inspection of the business facilities
  • Listing and condition of machinery, equipment and inventory
  • Listing of accounts receivable
  • Insurance
  • Guarantee Agreements
  • Required approvals and consents

In addition, depending on whether or not the seller will continue to be involved in the business, satisfactory consulting or employment agreements, in the first instance, or non-compete, in the later instance, should also be executed.

Selling your business can create a “win-win” based on the parties engaging in a methodical and realistic due diligence review of your company.

Business Formation – Back to the Basics

So you want to form a business?  Be aware that while the formation of the correct business entity is important, how you get out of the business or how you get another owner out is even more important.

The actual formation of a business entity is easy and relatively inexpensive.  Too many people use online services to form a business, or even when using an attorney, don’t take the more important next step – creating the operative document that delineates the powers, authority, distribution of profits and payment of debts and finally how to deal with a change in “corporate” ownership.  This change could be bringing someone else into the company as a part owner/investor or having an owner leave either voluntarily or not.

The documentation filed with the Secretary of State’s office to initially form an entity does not, in itself, insulate the owners from personal liability. The actual operating agreement must be completed and executed, and the parties must adhere to its provisions to obtain personal liability protection.This important document is not usually obtainable through the online services, and when it is, the document is so generic it is of little practical use.  The governing document is called several things (i.e. shareholders agreement, bylaws, regulations, member agreement, partnership agreement, company agreement). Don’t get cheap in the organization of your business, concentrating on the organization documents, while ignoring the governing document.  If you do, chances are you will pay a lot more without it in litigation.  This is especially true when you have more than one owner.  When you have a single owner the document is important to guide the estate.

For the purposes of this blog post, we will call the governing document the Company Agreement because this is the term for the governing document for a limited liability company (LLC), which has become the most popular business entity because LLC’s do not have to follow corporate formalities.

The first consideration is the percentage of ownership and how it will be evidenced.  You do not have to actually invest money.  What is considered “time, toil, & talent” can also be a basis for the percentage of ownership.  Take for instance someone who wants to form a hair salon and spa business.  The initiator/investor is willing to invest his money, but he knows nothing about hair styling and salon management.  His other owner is the actual person doing the styling and running the operation.  It just so happens that his daughter is a new hair stylist and will be working in the business.   His “dream” is to obviously make a return on his money, but he also wants his daughter to someday become an owner and eventually take his place as an owner when he decides to “cash out”.

So with two owners, each one should own ½ of the business, right? That structure actually sets the owners up for deadlock, with each party essentially having veto power over any decisions. So let’s make it 51% to 49%, which works for the majority owner, but leaves the minority owner unprotected in most instances. The solution is to specifically craft the management decision-making power to fit the circumstances of the business. For example, the “talented” owner makes the day- to-day operations of the business, while the “money” owner has to consent to capital expenditures, cash calls, or sale of the business. The parties can also include an alternative dispute resolution process such as mediation or arbitration.

What if the business is based on some “unique” concept? Provisions that address confidentiality, non-competes and trademark licensing are a few matters that should be included in the Company Agreement.

If the owners of the business are individuals, the owners need to consider adding a buy-sell structure in the event of death, disability, divorce, or bad behavior. Agreeing on a valuation process at the beginning of the relationship avoids protracted disputes when such events later occur. Likewise, if the owners wish to admit additional owners, or sell out, a process should be clearly delineated in the Company Agreement.

As the adage says: “An ounce of prevention is worth a pound of cure.”

Inequality Scales

Collections – Pointers For Success

The first step in Collections is knowing your customer. And we mean, REALLY knowing your customer.

Collection of any debt starts at the very beginning of the debtor/creditor relationship.  Many of you may not think of yourselves as a creditor, but any time you sell a good or provide a service that is not paid via cash or credit card….that is a credit transaction.  Any time you invoice for your goods or services, you are extending your customer credit.  You are betting that your customer will pay per the agreement you have in place, usually net 10 or 30 days.

Too often only a name and address is obtained…however, have you actually verified this information?  For instance, the name “ABC Services” may not have any direct relation to the actual company name.  Here are some examples:

  •  “ABC Services” could be a partial name for the correct business, ABC Services and Construction, LLC. There could be numerous ABC Services.  You must know which one is your customer.
  • “ABC Services” could be an assumed name for John Doe.
  • “ABC Services” could be an assumed name for XYZ, Inc. or worse XYZ, L.P.

And what about that address?  Very often 123 Main is nothing more that a private postal mailing center.

Here are some pointers:

  • When dealing with an individual, get his/her full name and driver’s license number.
  • If you are dealing with a business, get the actual full name and ask what type of business entity they are.  A business entity will typically end with “Inc.”, “LLC”, or “LP”.
  • “Inc.” indicates a corporation.  Find out where it was incorporated and obtain its registered agent and registered address.  Never solely rely on a P.O. Box.  Always obtain a physical address.  If the registered agent is a corporation such as CT Corporate Systems, also get at least one officer’s name and physical address.
  • “LLC” indicates a limited liability company.  Obtain the same info as a corporation.  In this case you also need to ask for the manager’s name and address and its members names and addresses.
  • “LP” indicates a limited partnership.  Obtain the same information as for the other entities, and also obtain the name and address of the general partner.  A general partner of a limited partnership is jointly and severally liable for the debt.  Be aware that the general partner is often a corporation or a limited liability company.  In that case, obtain the requisite info for that entity.
  • Obtain the name and address of a bank reference where they maintain their bank account.  Always keep a copy of any checks received from the customer.  At “crunch time” in the collection process, you might be able to garnish the bank to collect your debt.

These simple beginning steps will go a long way to help you when your customer doesn’t pay and you have to start the collection process.  Being able to give this information to your attorney will save you time and money.  If you need assistance in collecting a debt, please keep Murray-Lobb, PLLC in mind.

Pitfalls of Affiliated Companies

Since its humble beginning in Wyoming in 1977, the limited liability company (“LLC”) type of entity formation has gained rapid acceptance as a way to avoid personal liability and still maintain administrative flexibility. In addition, many lenders now insist that borrowers create a separate single-purpose entity for each project. Thus, most businesses consist of multiple affiliated companies that are each supposed to be treated discretely under the law. However, since non-corporate entities such as partnerships and LLCs are not required to hold regular meetings or even appoint officers, the owners of those entities tend to overlook other company formalities as well. This lackadaisical attitude may inadvertently create a situation where creditors come to rely on assets of affiliates, not just the entity with which they have a contract. In a bankruptcy proceeding, the creditors may go so far as to ask the court to substantively consolidate the affiliated companies.

The following are the most common pitfalls that affiliated companies should avoid in effort to preserve the benefit of each company’s independent existence:

Entangled Finances – If affiliated companies co-mingle their funds or one entity pays the bills for another entity without appropriate inter-company transfer records, it becomes increasingly difficult to distinguish the assets and liabilities of each company. Moreover, many affiliated companies produce only consolidated financial statements that imply that additional resources are available to satisfy an entity’s debts. If the entities share bookkeeping personnel, then mistakes become even more likely.

Reliance on Credit of Affiliates – If affiliated companies pledge any of their assets to secure loans to another entity or guarantee such loans, creditors may be entitled to rely on the credit of all of the entities. Creditors often request financial statements from such affiliates and require joint and several liability among the affiliates. Creditors may press hard for consolidation if some entities are asset-rich while others have major liabilities.

No Separate Stationary and Signatories – Often a group of companies will have one overarching trade name and will not clearly indicate the particular affiliate that is acting with respect to a transaction. Similarly, sometimes multiple entities will be executing the same document. If the same person signs the documents for several different entities, it is very easy to make a scrivener’s error and confuse the entities. Likewise, with modern computer technology, duplicated and revised documents with global changes to names, may not reflect the actual intent of the parties in every cases. These similar, yet different, documents can lead to unintended consequences and may require extra time and expense to audit and correct errors.

Undercapitalization – If a company does not have sufficient assets to pay for its liabilities in the ordinary course of business and is dependent on an affiliate for funding, then creditors may seek recovery against the finding entity too.

If a business is structured with several affiliated companies, the owners must still be diligent about ensuring that each entity is capable of standing alone both financially and contractually. Owners should also make clear to creditors that only that particular company may be relied on for payment. If not, all of the effort put into creating the separate companies may be disregarded in favor of producing more equitable results for creditors of affiliated companies.

Shareholder Oppression – The Texas Supreme Court has Spoken

On June 20, 2014 in the case of Ritchie v. Rupe, the Texas Supreme Court declined to recognize a common-law cause of action for shareholder oppression. Much of this article is quoted from the actual opinion.

The Texas Supreme Court found that existing statutory law adequately protects and provides remedies for various categories of conduct identified as frequent causes of shareholder oppression.  The Court addressed each of the common complaints of conduct giving rise to the shareholder oppression cases and identified the statutory cause of action for each.  They are as follows:

  1. Denial of Access to Corporate Books and Records.  A common complaint of those alleging shareholder oppression is the denial of access of the corporation’s books and records.  The Court held that Texas Business Organizations Code, Chapter 21 expressly protects a corporate shareholder’s right to examine corporate records. See Tex. Bus. Orgs. Code §§ 21.218 (examination of records), 21.219 (annual and interim statements of corporation), 21.220 (penalty for failure to prepare voting list), 21.222 (penalty for refusal to permit examination), 21.354 (inspection of voting list) and 21.372 (shareholder meeting list).
  2. Withholding or Refusing to Declare Dividends.  A second complaint of those alleging shareholder oppression relates to the corporation’s declaration of dividends, including the failure to declare dividends, the failure to declare higher dividends, and the withholding of dividend payments after a dividend has been declared.  With regard to the latter, shareholders already have a right to receive payment of a declared dividend in accordance with the terms of the shares and the corporation’s certificate of formation, and they can enforce that right as a debt against the corporation.  When a dividend is declared, it becomes a debt owing by the corporation to the stockholders.   With regard to the failure to declare dividends or the failure to declare higher dividends, those decisions fall within the discretion of a corporation’s directors, and those decisions must be made in compliance with the formal fiduciary duties that they owe to the corporation, and thus to the shareholders collectively.  Shareholders can sue the directors for breach of those duties on behalf of the corporation through a derivative action.  In sum, a remedy exists for dividend decisions made in violation of a director’s duties to the corporation and its shareholders collectively, but no remedy exists for decisions that comply with those duties, even if they result in incidental harm to a minority shareholder’s individual interests.
  3. Termination of Employment.  A third common complaint of those alleging shareholder oppression relates to the termination of the minority shareholder’s employment with the corporation.  Texas is steadfastly an at-will employment state.  The general rule has been absent a specific agreement to the contrary, employment may be terminated by the employer, or the employee at will, for good cause, bad cause, or no cause at all.  There may be situations in which, despite the absence of an employment agreement, termination of a key employee is improper, for no legitimate business purpose, intended to benefit the directors or individual shareholders at the expense of the minority shareholder, and harmful to the corporation.  Such a decision could violate the director’s fiduciary duties to exercise their uncorrupted business judgment for the sole benefit of the corporation and to refrain from usurping corporate opportunities for personal gain.  In such a case, a shareholder may enforce these duties through a derivative action.  Such action could also be potentially “oppressive” under Tex. Bus. Orgs. Code §11.404 and thus justify the appointment of a rehabilitative receiver under Tex. Bus. Orgs. Code §11.404 (a)(1)(c).
  4. Misapplication of Corporate Funds and Diversion of Corporate Opportunities.  A fourth complaint of those alleging shareholder oppression involves the misapplication of corporate funds and diversion of corporate opportunities.  The duty of loyalty that officers and directors owe to the corporation specifically prohibit them from misapplying corporate assets for their own personal gain or wrongfully diverting corporate opportunities to themselves.  These types of actions may be redressed through a derivative action, or through direct action brought by the corporation, for breach of fiduciary duty.
  5. Manipulation of Stock Values.  The final complaint of those alleging shareholder oppression involves the directors’ manipulation of the value of the corporation’s stock.  As a general rule, claims on such conduct belong to the corporation, rather than the individual shareholder.  The individual shareholders have no separate and independent right of action for injuries suffered by the corporation which merely result in the depreciation of the value of their stock.

Importantly, the Court also recognized that the business judgment rule is applicable to decisions made by office and directors in actions under the Tex. Bus. Orgs. Code §11.404 (a)(1)(c).  The Court held that “a corporation’s directors or managers engage in “oppressive” actions under §11.404 when they abuse their authority over the corporation with 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 so doing so create a serious risk of harm to the corporation”.

The Court further ruled that the statue (Tex. Bus. Orgs. Code §11.404) does not authorize a buy-out remedy of a minority shareholders shares, even if such actions are deemed oppressive under the statute.

The case can be found here.