The law holds that when a corporate officer (including one who is also a majority shareholder) becomes aware of a business opportunity by virtue of his position with the corporation, the officer has the duty to present that opportunity to the corporation, rather than seizing the opportunity for himself. The officer must fully disclose all details about the opportunity, and he may have to allow the minority shareholders to decide whether the corporation should proceed with the opportunity. If these steps are not followed, the minority shareholders may have a claim for usurpation of corporate opportunity.
If you own less than 50% of the stock in a small company, you cannot dictate how the company will be managed or whether the shareholders will receive dividends or other distributions of profits. Nonetheless, as a minority shareholder, you have important rights of ownership that cannot be ignored by the majority owners.
In the past, Texas law allowed minority shareholders to sue the majority owners if the majority engaged in oppressive behavior that deprived the minority owner of his fair share of profits. Although the Texas Supreme Court abolished this right in its 2014 decision in the Ritchie v. Rupp case, there are still remedies available to ensure that a minority shareholder is treated fairly.
Knowing that minority shareholder oppression is no longer a constraint in Texas, majority owners often act in a manner that deprives a minority owner of the basic benefits of ownership, and instead diverts a disproportionate share of profits to the majority. When that occurs, a minority shareholder should seek legal advice.
The oppressed minority shareholder can bring claims for breach of fiduciary duty, usurpation of corporate opportunities, or breach of contract. The shareholder may also be able to gain leverage by demanding the inspection of records on a regular basis, or forcing the corporation to hold shareholder meetings and demanding that areas of concern be addressed by the majority. Our goal in these cases is to convince the majority that they would be better off to make a fair purchase offer for the minority shareholder’s stock.
In recent years, Texas courts have made attempts to define the types of actions by majority owners that are “oppressive.”
1. Oppressive 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 join the venture or purchase the stock. These expectations can be general expectations that are common to all companies, or specific expectations that arose because of the specific facts surrounding the investment in this particular company. Examples of general expectations are: the right to participate proportionately in the earnings of the company, the right to vote on issues that require shareholder approval, the right to inspect the books and records of the company, and the right to enjoy any appreciation in the value of the stock. Examples of specific expectations could include the expectation that all shareholders would also be employees of the corporation or the expectation that shareholders would have a say in the day-to-day management of the company.
2. Oppressive conduct is burdensome, harsh, or wrongful conduct which demonstrates a lack of probity and fair dealing in the company’s affairs to the prejudice of the minority shareholders. It is conduct that isa visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. Examples of conduct that have been found to be unfair include: (a) electing to have the corporation taxed as a partnership while simultaneously refusing to pay dividends sufficient to pay the tax liability, despite the availability of funds to do so; and (b) the majority owner’s decision to pay himself a salary in excess of what is reasonable for his position and level of responsibility, creating a de facto dividend to the exclusion of the minority shareholders.
3. When a business owner decides to reward an employee with stock ownership, the benevolent boss occasionally changes his mind when the corporation becomes extremely successful. If the majority owner gets greedy, he may try to minimize the value of the employee’s stock by moving corporate assets or corporate opportunities into another company that is owned by him alone. Under the law, this diversion of value is referred to as “usurpation of corporate opportunity.” This type of oppressive conduct can be difficult to trace and prove if the majority owner has used shell corporations or attempted to conceal the fact that he controls the new businesses.