Texas Supreme Court's Recent Shareholder Oppression Opinions Reaffirm Primacy of Common Law Fiduciary Duties Under Gearhart

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In three recent cases, the Texas Supreme Court has made it clear that for claims of "minority shareholder oppression"—essentially, acts of a majority shareholder group that are harmful to a minority shareholder without necessarily harming the corporation itself—the sole remedy available under Texas law is a statutory receivership. The Court also emphasized that common law fiduciary duties (including the business judgment rule), as articulated in Gearhart Indus., Inc. v. Smith Intern., Inc., 741 F.2d 707,723–24 (5th Cir. 1984), are still the appropriate lens through which to evaluate the conduct of directors of Texas corporations.

In Ritchie v. Rupe, 2014 Tex. LEXIS 500 (Tex. June 20, 2014), the respondents appealed a judicially enforced buyout of a minority shareholder's shares in a closely held corporation in order to provide a remedy for alleged acts of shareholder oppression. The minority shareholder had alleged that a failure by the majority shareholders and management to either buy out her shares at a fair price, or meet with prospective outside buyers, constituted shareholder oppression in that it unfairly deprived her of an opportunity to obtain liquidity for her shares.

The Court overturned the decisions of the lower courts, holding that: (1) the receivership statute under which oppression was being claimed did not allow for a forced buy-out as a remedy, (2) that the alleged wrongs did not rise to the level necessary to overcome the business judgment rule and justify the appointment of a receiver, and (3) that a common law cause of action for shareholder oppression does not exist in Texas, due in part to the availability of other remedies.

In a second case, Cardiac Perfusion Servs., Inc. v. Hughes, 2014 LEXIS 532 (Tex. June 27, 2014) (per curiam), the Court overturned a similarly granted buy-out, and in a third ruling, Argo Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012, pet. denied), the Court declined to hear an appeal from a minority shareholder whose claims for oppression had been denied by the lower appellate court.

In declining to either (a) provide remedies other than receivership for statutory claims of shareholder oppression, or (b) recognize a common law cause of action for shareholder oppression, the Texas Supreme Court has confirmed that the threshold for statutory claims of oppression is a high one, requiring that a claim of oppressive conduct be accompanied by a showing of conduct that is "inconsistent with the honest exercise of business judgment and discretion by the board of directors." Ritchie v. Rupe, at *28 (citing Texarkana College Bowl, Inc. v. Phillips, 408 S.W.2d 539, 539 (Tex. Civ. App.—Texarkana 1966, no writ)).

Topics:  Board of Directors, Buy-Out Agreements, Fiduciary Duty, Minority Shareholders, Oppression Remedy, Receivership, Shareholders

Published In: Business Torts Updates, Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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