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.

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