MINORITY OWNERS’ RIGHTS CONTINUE TO EXPAND
Texas courts recognize that majority owners in private companies must deal fairly with their minority owners or face claims for minority shareholder oppression. Texas courts have approved the following as acts of shareholder oppression: malicious oppression of dividends (starving out the little guys), personal use of corporate funds (the personal piggy bank syndrome), “squeeze-out” techniques such as diverting corporate opportunities, excessive payment of dividends, or attempts to deny minority shareholders the fair value of their shares.
Now, in Ritchie v. Rupe, the Dallas Court of Appeals has determined that (i) shareholder oppression can exist even if there is no single, majority shareholder and (ii) the refusal to reasonably cooperate in a minority shareholder’s efforts to sell stock can be shareholder oppression. In Ritchie,after attempts to sell her stock to the other owners failed, the minority owner (18% of the stock), hired a consultant to market her stock to outsiders. The consultant requested that management of the company meet with prospective buyers, but was told that neither management nor any of the other owners would cooperate. At trial the consultant testified that without this cooperation it was impossible to sell the stock because interviewing management is a regular part of a prospective buyer’s due diligence. The trial court concluded that this failure to allow management to be interviewed by prospective buyers constituted minority shareholder oppression. The appellate court agreed, reasoning that the minority shareholder’s reasonable expectation of having the right to sell her stock to a party of her choosing had been defeated by the other shareholders. The appellate court acknowledged that not any one of the parties who refused to participate or allow management to participate in the interviewing process owed a majority of the stock, but reasoned that it was sufficient for purposes of a minority shareholder oppression claim that they were “directors” and “those in control of the corporation”.
Finally, the appellate court agreed with the trial court that an appropriate remedy for shareholder oppression is the court ordering a buyout of an oppressed minority shareholder. In Ritchie the jury found the minority owner’s stock had a fair market value of $7.3M and ordered the defendants to purchase the stock for that amount.
Significance: Texas courts continue to expand the acts that can be made the basis of a minority shareholder oppression clam. If you are the majority owner in a company or if you are in “control” of a company, you need to be cautious about causing the company to take or not take an action that negatively impacts the minority owners. Actions taken or not taken that negatively impact minority shareholders, but are truly in the interest of the company and not designed or intended to negatively target minority owners, fall outside the scope of minority shareholder oppression, but will be scrutinized nonetheless.
Please e-mail John Havins with questions or comments.