© 2014 The Texas Lawbook.
By Richard A. Smith, JD
Special Contributing Writer to The Texas Lawbook
(June 20) – In a potential landmark decision for Texas business law, the Supreme Court of Texas has reversed a lower court ruling that a minority shareholder was entitled to “fair market value” for his or her shares, including “discounts for lack of marketability and for the stock’s minority position.”
In a 6-3 decision authored by Justice Jeffrey Boyd, the state’s highest court held that it is not oppressive conduct for the majority shareholders to refuse to meet with prospective purchasers of the company, that the Business Organizations Code does not authorize courts to order a corporation to buy out a minority shareholder’s stock, and that there is no common-law cause of action for minority shareholder oppression.
The 54-page opinion reverses the Dallas Court of Appeals in the case Ritchie v. Rupe.
According to the Texas Supreme Court summary, authored by staff attorney Osler McCarthy, this dispute involves stock in a Dallas-based family company, Rupe Investment Corp.
All stock in Rupe Investment is held by descendants of Dallas businessmen Gordon Rupe, Jr. and Robert Ritchie or by trusts for their descendants’ benefit.
Ann Rupe, in charge of a trust her late husband established to hold his shares, sued Lee Ritchie and other Rupe Investment directors because they refused to meet potential buyers of her stock.
The other directors cited liability problems in such meetings. Rupe hired a broker to sell the stock after she refused the directors’ offers to buy her stock for as much as $1.7 million. The broker priced it as high as $3.4 million, but testified that no purchaser would buy it without meeting with the company’s management.
Finding oppression, the trial court ordered Rupe Investment to buy the stock for $7.3 million, the jury’s fair-market valuation. The court of appeals affirmed the trial court’s oppression finding, but reversed to revalue the stock.
The Analysis
In reversing that decision, Justice Boyd’s majority opinion for the Supreme Court first analyzed the case under the receivership statute, currently codified at section 11.404 of the Texas Business Organizations Code. That statute permits a court to appoint a receiver when “the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent . . .”
Construing and rejecting previous cases that have considered the meaning of “oppressive” conduct, the court today holds that directors or managers engage in oppressive conduct “when they abuse their authority over the corporation with the 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 doing so they create a serious risk of harm to the corporation” (emphasis added).
Since shareholder oppression cases have typically focused on whether the minority shareholder has been improperly harmed, the additional question of whether the majority is putting the corporation itself at risk of harm appears to be a significant shift in the law. Because the directors here had legitimate business reasons for refusing to meet with prospective buyers, there was no “serious risk of harm to the corporation,” and therefore no oppression.
But two other holdings by the Texas Supreme Court are perhaps even more significant.
Besides the refusal to cooperate with the sale of her shares, Rupe also alleged that the defendants had engaged in other types of oppressive conduct. The court declined to consider those other acts, however, based on its determination that the receivership statute does not authorize the remedy of a buyout of the minority’s shares.
Thus, a court may order the appointment of a receiver if the corporation itself is threatened with harm, but it cannot order a buyout just because the minority shareholder is being harmed by the majority’s business decisions.
Because the receivership statute does not permit a buyout, the court also turned to the question of whether there is a common law cause of action (and remedy) for shareholder oppression, and concluded that there is not.
Although the court recognized Texas law should protect minority shareholders from “freeze-out” or “squeeze out” tactics of the majority, it held that there are already sufficient protections with remedies such as derivative lawsuits, shareholder agreements, and common law claims such as breach of fiduciary duty and accounting.
Because of this, there was no need to recognize a common law claim for minority shareholder oppression, thus it could not serve as the basis to order an equitable buyout of the minority’s shares. And in fact, the Supreme Court remanded the case for further consideration of the plaintiff’s breach of fiduciary duty claim.
Going forward, the majority opinion today imposes significant restraints on shareholder oppression claims, refocusing the claim on harm suffered by the company rather than its minority shareholders and eliminating the ability of courts to order buyouts, whether at fair market value or any other price.
Lawyers and clients should also make careful note of the majority’s emphasis on the utility of shareholder agreements in providing for the kinds of contractual remedies that can provide in advance for buyout provisions and other remedies that would moot the need for any shareholder oppression claim. But as Justice Eva Guzman’s dissent correctly notes, this is a decision that puts minority shareholders in a much weakened position when their personal interests clash with the decisions of the majority.
Dallas attorney Robert Gilbreath of Hawkins Parnell Thackston & Young orally argued the case Texas’ highest court for the petitioners (Richtie et. al). Jeffrey Levinger, also based in Dallas, argued for Mrs. Rupe.
At the trial level, counsel for both parties were all from Dallas as well. Amy Davis of Christiansen Davis Bullock, Hilaree Casada of Cowles & Thompson and Katherine Elrich of Hermes Sargent Bates represented the defendants. Steve Aldous of Forshey Prostok and Charla Aldous of Aldous Law Firm represented Mrs. Rupe.
Richard A. Smith is a partner at Lynn Tillotson Pinker & Cox in Dallas. He is the author of the popular appellate blog, 600Commerce.com.
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