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November 1, 2017Eric Fryar
Filling in the Gaps: Shareholder Oppression After Ritchie V. Rupe: Part 1
On June 20, 2014, the Texas Supreme Court’s decision in Ritchie v. Rupe1 initiated a seismic shift in Texas law governing the protection of minority shareholders in closely-held corporations and limited liability companies. After almost thirty years of steady appellate court development of a judicial remedy for oppressive conduct against minority shareholders, recognizing the trial court’s power to force an oppressive controlling shareholder to purchase the oppressed minority shareholder’s stock for a fair value, the Texas Supreme Court suddenly announced that no common law cause of action for oppression existed and that Texas courts had no power to order a buy-out under the statutory remedy for oppression. Three dissenting Justices accused the majority of “extinguish[ing] meaningful protections for minority shareholders.” A host of academic articles and continuing legal education papers from practitioners both decried and applauded the demise of the shareholder oppression doctrine. The gloomy assessment: “In the wake of Ritchie, minority shareholders are already having a much tougher time in the courts.”
March 4, 2016Cliff Ernst, Elizabeth S. Miller
Model Company Agreements for Simple LLCs
Limited liability companies have become the entity of choice in Texas and other states. However, unlike corporations in which many of the provisions for the ownership and management of the entity are stated in the governing statute, owners are free in many respects to make their own rules regarding the management and financial terms for a limited liability company. They do this by entering into a company agreement. This puts an added burden on the practitioner to be sure that the agreement drafted by the practitioner accurately reflects the terms of the transaction envisioned by the practitioner’s client, comports with the applicable entity and tax laws and establishes a basis for a predicable outcome in the event of disputes regarding the responsibilities, obligations and benefits related to the company. The authors hope that the model agreements included and discussed in this paper will be useful as lawyers strive to accomplish these goals.
May 17, 2015Elizabeth S. Miller
The Demise of the Shareholder Oppression Doctrine in Texas: Pursuit of Claims By Minority Shareholders (And LLC Members) After Ritchie V. Rupe
Until 2014, courts of appeals in Texas had recognized the availability of various equitable remedies, including a court-ordered buyout, where a minority shareholder established that the majority shareholder engaged in “oppressive” conduct. “Oppressive” conduct was defined by the courts as: (1) majority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to invest; or (2) burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. Davis v. Sheerin, 754 S.W.2d 375, 381-82 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (awarding minority shareholder an equitable buyout at fair value as determined by the jury based upon the majority’s refusal to recognize the minority’s ownership in the corporation). The seminal case in this area was Davis v. Sheerin. In the years after the Davis case, oppression cases in Texas appeared with increasing frequency. Some courts also applied the shareholder oppression doctrine in the context of limited liability companies. In a landmark 6-3 opinion in 2014, the Texas Supreme Court disapproved of the manner in which courts of appeals had been applying the oppression doctrine and significantly limited the reach of the oppression doctrine. In Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), the court: (1) rejected the “reasonable expectations” and “fair dealing” tests for oppression that courts of appeals had been applying in Texas since 1988 and adopted a definition requiring abuse of authority by management with intent to harm an owner in disregard of management’s honest business judgment; (2) held that a rehabilitative receivership is the only remedy for oppression under Section 11.404 of the Business Organizations Code; and (3) declined to recognize a common-law cause of action for oppression.
November 8, 2013F. Eric Fryar, Christina Richardson, Caitlin B. Feste, Rusty Sewell
Shareholder Oppression: Is It a Cause of Action?
In troubled economic times, the temptation to exercise power over business partners can be overwhelming—whether borne out of greed, a sense of entitlement, or even a perceived need for self-preservation. This article deals with the rights of individual shareholders in closely held corporations. This is an area that is poorly developed in Texas law and plagued with apparent contradictions in the dicta. The most common case arising out of the abuse of corporate powers has to do with officers or directors using their power to steal from the corporation (and thus from the shareholders as a group). Shareholders often bring these cases, and a very common result is the dismissal of the lawsuit because the duties violated are owed to the corporation and not to the shareholders individually. Several Texas cases seem to suggest that there are no (or at least very few) duties owed to shareholders individually. In recent years, individual shareholders have been prevailing in lawsuits asserting claims for shareholder oppression—claims based on duties owed to the shareholders individually. In this article, we will explore the basis of these claims. We will not deal with the closely related issue of derivative suits or with duties owed by officers and directors to corporations.
May 26, 2012Elizabeth S. Miller
The Shareholder Oppression Doctrine in Texas
Shareholder (and LLC member) oppression claims have become increasingly common over the twenty-plus years since the First Court of Appeals in Davis v. Sheerin defined oppression and recognized the potential remedy of a buyout, and anecdotal evidence suggests that oppression claims have proliferated at a rapid rate in the last couple years. The breadth and vagary of the judicial definition of “oppression,” along with questions regarding the adequacy and availability of remedies other than receivership, present courts with significant challenges. A petition for rehearing of the Texas Supreme Court’s decision to deny the petition for review in Ritchie v. Rupe is pending, but the court’s initial denial of review suggests that the possibility the court will take up the case is remote. Until the Texas Supreme Court provides guidance in this area, the precise parameters of the doctrine remain somewhat shrouded in mystery.
May 26, 2012Charles Henry Still
Director and Officer and Controlling Shareholder Duties and Liabilities Under Texas Law - Fiduciary Duties and Shareholder Oppression
The prior corporation laws and other entity statutes were codified in the Texas Business Organizations Code, which became effective for all Texas corporations on January 1, 2010. The Texas Business Corporation Act (“TBCA”) provisions referred to herein have been carried forward substantially in the Texas Business Organizations Code, which is referred to throughout as the “BOC” or the “Texas BOC”.
November 2, 2012Elizabeth S. Miller
The Shareholder Oppression Doctrine in Texas
Shareholder (and LLC member) oppression claims have become increasingly common over the twenty-plus years since the First Court of Appeals in Davis v. Sheerin defined oppression and recognized the potential remedy of a buyout, and anecdotal evidence suggests that oppression claims have proliferated at a rapid rate in the last couple years. The breadth and vagary of the judicial definition of “oppression,” along with questions regarding the adequacy and availability of remedies other than receivership, present courts with significant challenges. A petition for rehearing of the Texas Supreme Court’s initial decision to deny the petition for review in Ritchie v. Rupe has been granted, but the swiftness with which the court initially denied review suggests that the possibility the court will take up the case is remote. Until the Texas Supreme Court provides guidance in this area, the precise parameters of the doctrine remain somewhat shrouded in mystery.
October 15, 2011Douglas K. Moll
Shareholder Oppression in Texas Close Corporations: Majority Rule (Still) Isn't What it Used to Be.
The doctrine of shareholder oppression protects the close corporation minority stockholder from the improper exercise of majority control. Although the Texas Supreme Court has not explicitly recognized the doctrine, appellate courts in Texas and in other jurisdictions have recognized and applied it in numerous decisions.