Texas Commercial Disputes and Minority Shareholder Law

The seventh anniversary of the Texas Supreme Court’s decision in Ritchie versus Rupee has come and gone, and the 2014 court ruling remains the law: Minority shareholders of private Texas corporations have no cause of action to sue for oppressive conduct against majority shareholders of the corporation. Although a bill surfaced in the Texas Legislature a few years later Ritchie who allegedly created this cause of action, it went nowhere, which leaves Texas among a minority of states that have no claim for minority shareholder oppression. As this article points out, however, minority shareholders have several other claims to make against the company’s majority owners, giving them real clout in the event of a dispute with their business partners.

The arrows that remain in the quiver

This article does not examine each of these causes of action in depth, but the range of claims that remain available to minority shareholders includes the following causes of action.

Breach of fiduciary duty

Majority owners who occupy positions of control in the company, for example, officers, directors and managers, have fiduciary duties to the company, including the duty of loyalty. Therefore, if controlling persons engage in personal dealings or otherwise abuse their authority in the management of the business, they are breaching their fiduciary duties and they are liable for the harm they cause to the business. .

The minority shareholder will have to make such claims of fiduciary duty on a derivative basis on behalf of the company, which may include claims for both damages and injunctive relief. A critical note is that the Texas derivative laws include a number of useful features for minority shareholders in private companies that do not exist in other states. In most other states, minority shareholders must comply with numerous procedural hurdles that prevent them from suing for derivatives. Under the Texas Business Organizations Code (TBOC), however, minority owners of private companies and LLCs can more simply and directly file claims for the company on a derivative basis against officers, directors and managers of the society who abuse their authority (see TBOC §§ 21.563, 101.463). Under the law, a closely held company means a company with fewer than 35 shareholders or members that is not listed on a stock exchange or listed on an over-the-counter market.

Some of the important procedural advantages enjoyed by minority shareholders when filing derivative actions under TBOC Section 21.563 are summarized below:

• Unlike normal derivatives practice, shareholders under this law do not have to make written requests to the company before taking action.

• There is no “good plaintiff” requirement, ie the minority shareholder does not have to prove that he will fairly represent the interests of the company;

• In typical derivative practice, any recovery obtained in the lawsuit accrues to the company, but under the law as applied to private companies, the trial court may award any recovery directly to the shareholder or shareholders minority who have brought an action “when justice requires it”. ”; and

• Finally, there is a bounty hunter aspect to the litigation, and minority shareholders are allowed to recover their legal costs if the court finds that the lawsuit “resulted in a substantial benefit to the company”.

Breach of contract

Certain types of conduct may give rise to multiple claims, and witness group conduct that constitutes a breach of fiduciary duty may also give rise to a breach of contract claim. The minority shareholder and his attorney should therefore carefully review the company’s articles of incorporation or the terms of the LLC operating agreement to determine whether the officers, managers, or directors have complied with the terms of these governance documents. When executives disregard the terms of the company’s own documents, this conduct gives rise to strong claims for breach of contract and the possibility of recovering damages and legal costs. Not all breaches are of equal significance, but minority shareholders will want to consider whether controlling persons have complied with all of the following provisions that may be included in corporate governance documents:

• Timely publication of annual and quarterly financial reports and annual audits;

• Issuance of all required distributions and related K-1 reports;

• Appoint and vote on new directors, officers and/or managers as needed;

• Document the admission of new shareholders or members and update company documents to correctly reflect all record owners and interests held; and

• Plan and hold board meetings, shareholder meetings and provide minutes of these meetings to all interested parties.

Appointment of a receiver to clean up or dissolve the company

Although this relief is rarely granted, minority shareholders have the legal right to ask a district court to appoint a receiver when majority shareholders engage in “unlawful, oppressive or fraudulent” conduct (see TBOC § 11.404). This is called a rehabilitation receivership, and the receiver is appointed to specifically address and rehabilitate the business by addressing improper conduct. This is a high standard for a shareholder, and the legal standard is discussed at length in the Ritchie cases, but the courts have been reluctant to impose this type of receivership.

If the minority shareholder is able to obtain the appointment of a judicial administrator under the conditions set out above, and the judicial reorganization remains for one year later without the resolution of the conditions which required the appointment of the administrator, the shareholder can request the dissolution of the company at this point (see To be confirmed § 11.405).

Receivership is considered a draconian remedy and should therefore only be considered available in cases where the conduct of the majority owners towards the minority shareholders has been of an extreme or impermissible nature.

Fraud

Another claim that should be considered by minority shareholders is a claim for common law fraud or fraud arising under the Texas Securities Act and related regulations. If the minority shareholder’s investment was induced by fraudulent representations made by majority owners, the shareholder may have a fraudulent inducement claim that would allow them to recover their investment, as well as other damages and legal costs. In this regard, the investigation of potential claims should focus on specific/actionable representations made by Majority Owners who clearly presented false information at the time they were made rather than mere statements of future prediction or general assurances (known as “puffs”) that did not misrepresent specific facts about the company, its financial information, or its status.

Conclusion

While minority shareholders of private corporations in Texas cannot sue majority owners for oppressive conduct, majority owners who manage and control the company are by no means immune from lawsuits based on their fault. When majority owners run their businesses, they have fiduciary duties to the business, including the duty of loyalty, and they are therefore subject to derivative lawsuits brought by minority shareholders on the basis of a personal transaction or any abusive abuse of power that harms the business. In addition, majority shareholders must adhere to the requirements of corporate governance documents and they cannot misrepresent the facts to shareholders or they will create liability for their own false and fraudulent conduct. In short, by virtue of their stakes, majority shareholders pull the strings of their business, but they must still follow the rules of the road if they want to avoid being the target of lawsuits for abuse of power.