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Texas Supreme Court declines to recognize a common-law cause of action for “minority shareholder oppression.”

In a case involving allegations of minority shareholder oppression in a closely held corporation1, the Texas Supreme Court declined to create a common-law cause of action for minority shareholder oppression in Texas. The Court reviewed the common complaints brought by minority shareholders, especially those involving “squeeze-out” or “freeze-out” tactics—(1) denial of access to corporate books and records, (2) withholding payment of, or declining to declare, dividends, (3) termination of a minority shareholder’s employment, (4) misapplication of corporate funds and diversion of corporate opportunities for personal purposes, and (5) ma14.06.22 Minority Shareholder Oppressionnipulation of stock values—and concluded that although gaps exist, the current legal framework offers adequate protection for minority shareholders. The Court also noted that minority shareholders have the ability to protect themselves through shareholder agreements and employment contracts.

Additionally, the Court for the first time considered the meaning of the term “oppression” as used in Texas’ Receivership Statute.2 The court discarded prior approaches used by Texas Courts of Appeals as inadequate and defined “oppression” in the statutory receivership context as when “a corporation’s directors or managers . . . 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 create a serious risk of harm to the corporation.” This definition will undoubtedly narrow the actions considered oppressive in cases seeking statutory receivership.

Anyone contemplating a minority shareholder position in any company, even in a family business, should consult with an attorney to make sure that their rights are adequately protected.

As a side note, this case, which involved trusts set up by the company’s founder, also underscores the difficulties of business succession planning and the complexities of using trusts for that purpose. The family trusts at issue in this case owned 72% of the voting stock and one of those trusts named the founder’s son and daughter and the daughter’s three children as beneficiaries. After the founder died, the son and the son’s second wife (whom the founder’s daughter allegedly did not like) had a child and asked that their child (the founder’s grandchild) be added as a beneficiary. The founder’s daughter and her children refused. This refusal ultimately contributed to the tension and disagreements that led to the lawsuit.

Unfortunately, the Texas Supreme Court’s decision does not end the case, it has been remanded to the court of appeals (and may ultimately go back to the trial court) at considerable cost to the litigants.  You can find the entire opinion here.

  1. Companies with fewer than 35 shareholders whose stock is not publicly traded.
  2. Texas Business Organizations Code section 11.404 (formerly Texas Business Corporations Act article 7.05) that authorizes Texas courts to appoint a receiver to rehabilitate a domestic corporation under certain circumstances.
 Image courtesy of franky242 / FreeDigitalPhotos.net

 

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