The Texas Business Corporation Act: The Texas Business Corporation Act sets forth the basic procedures for the formation, governance, and operation of a corporation formed in the State of Texas. Any action undertaken by the majority shareholders of a corporation must follow the procedures set forth in the Act. Although the Act is complex and covers virtually every aspect of corporate governance, some specific provisions are worth noting. For example, Article 5.11 of the Act allows minority shareholders to “dissent” from certain actions taken by the corporation, and in some instances, the dissenting shareholder can force the corporation to buy back his shares at the fair market value. Article 5.14 enumerates the conditions under which a shareholder can initiate a lawsuit on behalf of the corporation to challenge actions taken by an officer or director that are not in the best interests of the corporation. The entire text of the Act is available on many different sites on the internet, including http://tlo2.tlc.state.tx.us/statutes/ba.toc.htm.
For many years, Texas courts recognized a cause of action for “minority shareholder oppression” that enable a minority shareholder to force the purchase of his stock at fair market value. Although the Texas Supreme Court changed that in 2014, many of the old cases still help define the types of conduct that may violate a minority shareholders’ rights and serve as the basis for a breach of fiduciary duty claim.
Willis v. Bydalek involved a dispute between a majority shareholder and two minority shareholders who were also employees of the company. When the majority owner decided to close the business and locked out the shareholder/employees who had essentially been running the business, the minority shareholders sued. The court found that the majority owners decision was justified by the failure of the business to generate any profits. In explaining its decision, the court set forth the two conditions when minority shareholders can sue for shareholder oppression: (1) the majority shareholder’s conduct substantially defeats the minority shareholder’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to invest in the company; or (2) the majority shareholder’s conduct is burdensome, harsh, or wrongful, demonstrating a lack of probity and fair dealing in the company’s affairs to the detriment of the minority shareholders, in a manner that is a visible departure from the standards of fair dealing upon which each shareholder is entitled to rely.
Davis v. Sheerin involved a dispute between a majority shareholder and a minority shareholder who owned 45% of the corporation, but was not actively involved in the management of the company. When the majority shareholder refused to allow the minority owner to inspect the books of the company, the minority owner sued. During litigation, the minority owner was able to show that he was entitled to not only 45% of the corporation’s assets, but also 45% of six tracts of land that the majority owner had purchased and held in his own name. The court also recognized that, given the oppressive conduct of the majority owner, the minority owner was entitled to force the liquidation of the company to collect his share of the assets.
Redmon v. Griffith involved a dispute between a 75% owner and a 25% owner of a trucking company, both of whom were actively involved in the operation of the business. When the majority owner fired the minority owner, the minority owner sued. The court found that even though the corporation could fire any “at will” employee, the firing was evidence that could be considered as part of the oppressive conduct of the majority owner. The court also found that the majority owner’s use of corporate funds to pay his personal bills supported the claims of shareholder oppression.
Ritchie v. Rupe involved a closely-held corporation whose stock had been passed down from its founders to their heirs. One heir, who owned 18% of the outstanding stock, wanted to sell her stock, but the majority shareholders refused to meet with any prospective purchasers or to cooperate with any purchaser’s due diligence efforts. The minority shareholder sued, claiming that this lack of cooperation was oppressive conduct which made it impossible to sell her shares. A jury agreed that shareholder oppression had occurred, and awarded the minority shareholder $7.3 million as compensation for the fair value of her stock. On appeal, the Dallas Court of Appeals affirmed that a forced purchase of the minority’s interest was a proper remedy under Texas law. The court also rejected the argument that shareholder oppression cannot occur unless there is a single shareholder who holds more than 50% of the stock, recognizing that a group of minority shareholders acting in concert can create a majority that is guilty of oppression. The most remarkable part of the appellate court’s opinion, however, is in its explanation of the types of conduct that can “defeat the reasonable expectations of a minority shareholder,” and thus qualify as oppressive conduct. The court explained that there are general expectations (shared by all shareholders in all companies) and specific expectations (based on the unique facts and circumstances of the particular corporation. The court gave two examples of specific expectations — expectations of employment in the corporation, and expectations of having a say in the management of the corporation. Many lawyers have latched onto these examples, and now seem to believe that shareholder oppression has occurred if a minority shareholder’s employment is terminated. The Ritchie v. Rupe opinion does not support that argument, and a lawyer must establish facts demonstrating that in a particular corporation, the shareholders had an implicit understanding that every shareholder would also be entitled to employment with the company. (The Court of Appeals’ decision in Ritchie v. Rupe was overturned by the Texas but it’s discussion on these issues is still useful.)