As you can see, I was just sitting here writing important things on my yellow legal pad and staring confidently at a bare wall. While I was doing that, I thought you might want to know about a Texas Supreme Court opinion that may have an effect on the practice of anyone that deals with business law.
On June 20, 2014, the Texas Supreme Court issued a 6-3 opinion, styled Ritchie v. Rupe that will have a significant effect on disputes regarding the rights of the parties in minority shareholder oppression disputes. These disputes often involve small companies in which a majority shareholder takes actions to freeze out the minority shareholder, such as refusing to declare dividends, denying access to the books and records of the company, denying them rights to engage in the management of the company, as well as taking actions such as increasing compensation and bonuses for the majority shareholders who serve as employees and officers.
In Ritchie, Rupe obtained a minority shareholder interest through a trust from her deceased husband, Buddy in a closely held family owned corporation. The family members of Buddy, owned the majority of shares in the corporation and had a poor relationship with Rupe. The company offered to redeem her shares for $1.7 million dollars, which Rupe considered to be a severe undervaluation of her interest. After Rupe tried to market her interest for sale to third parties, the majority shareholders refused to meet with any potential third party buyers. As such, she was unable to find any third party willing to buy her shares.
Rupe filed suit in Dallas County, and brought common law claims for minority shareholder oppression, statutory claims under the receivership statute for liquidation, and claims of breach of fiduciary duty, and sought in part that the company be required to purchase her interest for appropriate value. After a jury trial, a verdict was rendered in favor of Rupe, which required the company to purchase her interest for $7.3 million dollars. The Dallas Court of Appeals affirmed the verdict, but remanded for a proper determination of the fair market value of her interest.
The Texas Supreme Court reversed, and in effect overturned over twenty years of Texas appellate case law. The Court found that there is no common law claim for minority shareholder oppression and that there is no basis under the receivership statute to require a majority shareholder to purchase a minority shareholders' interest. However, the Court left open the possibility that a buy out could be a remedy in an appropriate finding of breach of fiduciary duty. The Court also severely limited the definition of oppressive conduct that would allow the appointment of a receiver under the receivership statute to rehabilitate the corporation.
Without debating the merits of the decision, it is quite possible the legislature may address this matter in the future. In the meantime, it's probably a good idea to counsel your clients on the change in the law, and perhaps review any company or shareholder agreements to address contractually how to handle the purchase and sale of the interest of the shareholders in the event of a dispute.
I've put copies of the majority opinion and dissent on my website if you are interested in downloading and reading them. https://www.shippadr.com/mediation-documents.php
Incidentally, they also make great bedtime stories to get your kids to fall asleep. As soon as I get to the section titled, "Oppressive Action under the Receivership Statute," my 7 year old daughter Ava passes out, or otherwise begs me to please leave the room and not come back. However, I should warn you. One downside of reading these to your kids is the resulting night terrors, and the blood curdling scream of the name "Chief Justice Nathan Hecht" at 3:00 am in the morning. Jarring to say the least. Needless to say, Ava prefers that her mother read to her from now on. Hope to see you soon. John