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Fiduciary Duties and Minority Shareholder Oppression From the Defense Perspective: Differing Approaches in Texas, Delaware, and Nevada
Suits by minority shareholders in Texas are on the rise and represent an expanding,cutting-edge area of civil litigation in this state and across the country. While the TexasSupreme Court and several appellate courts in Texas have yet to recognize a cause of actionfor shareholder oppression or to define its parameters, a growing number of courts have upheldclaims for shareholder oppression or at least recognized it as a viable claim. But these courts’justifications for recognizing a broad shareholder oppression claim are questionable, becausethey rely on: (1) a Texas Supreme Court case that never blessed shareholder oppression as avalid claim; (2) a Texas receivership statute that allows relief from oppression only in limitedand extreme circumstances; and (3) a Texas appellate court case that relied on the previous twofaulty grounds and on inapplicable case law from other jurisdictions. The Texas SupremeCourt recently granted review to a shareholder oppression case (Ritchie v. Rupe), and willconfront this issue in the very near future. Argument was heard on February 26, 2013.
Differences in Drafting for Majority, Minority and 50/50 Owners in an LLC
Drafting the organizational documents for a business entity with multiple owners with differing interests is rarely “simple and straightforward”. Careful consideration needs to be given to the specific nature of the business arrangement, the ownership level of each owner, and what talents and resources each owner is bringing to the table in order to put together organizational documents that protect the key areas of concern for a client.
How To Effectively Deal With Minority Shareholders: Some Practice Pointers And Recent Developments
Minority shareholders, or shareholders who own less than 50% of the outstanding voting interests of a company, are typically shareholders of companies backed by venture capital and are often a key source of venture capital funding, particularly in the early stages of venture capital transactions. Although venture capital funding has generally declined in the United States during 2016, with approximately $39 billion invested during the first three quarters of 2016 as compared to approximately $48 billion invested during the relative period in 2015, the U.S. venture capital market is expected to rebound at the end of 2016 or in early 2017. When seeking out minority shareholders to invest in VC-backed companies, majority shareholders should carefully consider a number of important protections and exit strategies commonly associated with minority investments.
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.
Drafting Shareholders’ Agreements in a Post-Ritchie v. Rupe World
A number of excellent articles have been written since the Texas Supreme Court’s decision in Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014) gutted the cause of action for shareholder oppression in the State of Texas. See, e.g., Shareholder and Member Oppression in Texas, Miller, E., State Bar of Texas 37th Annual Advanced Civil Trial Course, Ch. 27 (October 31, 2014); Oppression of Minority Shareholders/ Members, Vela, R. State Bar of Texas 12th Annual Advanced Business Law Course, (November 7, 2014); Minority Shareholder Claims in the Wake of Ritchie v. Rupe, Stahl, E., State Bar of Texas 9th Annual Fiduciary Litigation Course (December 5, 2014); Remedies for Minority Shareholders in the Wake of Ritchie v. Rupe, Hinson, K. State Bar of Texas 7th Annual Damages in Civil Litigation Seminar, February 27, 2015; and The Demise of the Shareholder Oppression Doctrine in Texas: Pursuit of Claims by Minority Shareholders (and LLC Members) after Ritchie v. Rupe, Miller, E., State Bar of Texas, Choice & Acquisition of Entities (May 22, 2015). This article will not re-plow the ground covered there, but instead ask and (hopefully) provide some answers to these two questions: “What practical impact does Ritchie have on the best practices for drafting Shareholders’ Agreements?” and “How will Ritchie change litigation strategies related to Shareholders’ Agreements?”
Shareholder and LLC Member Oppression in Texas
Since 1955, “oppressive” conduct by the directors or those in control of a corporation has been grounds for a shareholder to obtain a receivership to rehabilitate the corporation. TEX. BUS. CORP. ACT ANN. art. 7.05.A(1)(c) (expired); TEX. BUS. ORGS. CODE ANN. § 11.404(a)(1)(C). (An unsuccessful rehabilitative receivership can lead to a liquidating receivership; therefore, although “oppression” is not directly grounds for court-ordered liquidation, “oppression” can indirectly lead to a liquidating receivership. TEX. BUS. CORP. ACT ANN. art. 7.06.A(3) (expired); TEX. BUS. ORGS. CODE ANN. § 11.405(a)(3).) When the Texas Limited Liability Company Act was enacted in 1991, it incorporated by reference the receivership provisions of the Texas Business Corporation Act (TBCA). TEX. REV. CIV. STAT. ANN. art. 1528n, art. 8.12.A (expired). Section 11.404 of the Texas Business Organizations Code (TBOC) applies to partnerships (both general and limited) as well as corporations and limited liability companies (LLCs). (Interestingly, Section 11.404 of the TBOC dropped the reference to “those in control” and simply refers to “governing persons.” The “governing persons” of an entity include the board of directors of a corporation, the managers of a manager- managed LLC or members of a member-managed LLC, and general partners of a partnership; however, an owner of an entity (even a majority owner) would not fall within the definition of “governing person” if the owner is not also a member of the governing authority of the entity. See TEX. BUS. ORGS. CODE ANN. § 1.002(35), (37).)
Oppression of Minority Shareholders/Members
In situations where a minority shareholder would like to be bought out or leave the business, they sometimes run into situations which may be viewed as oppression by the majority shareholders. It is often believed that the majority shareholders hold all the power in the business. But is that really the case? And, if a minority shareholder comes to you with a scenario which appears to be oppressive, what advice can you give him and what actions can you take on his behalf?
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.
Fiduciary Duties of Partners, Members & Managers
The sum and substance of the fiduciary duty is the duty to place the interests of one or more other parties before his or her own. This is the highest duty imposed in law, and it logically applies to limited categories of relationships. Where a fiduciary duty exists, the compliance burden is very high. Parties in litigation often dispute the existence of the relationship as well as its substance. Increasingly, parties seek to limit the scope of fiduciary duties by contract before litigation arises. This article will address these efforts as well as the scope of the fiduciary duty in partnerships, limited partnerships and limited liability companies. Finally, the article will address causes of action related to fiduciary duty issues in smaller companies, specifically, aiding and abetting a breach of fiduciary duty and shareholder oppression.
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.
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”.
Am I My Brother's Keeper: The Rights and Duties that Co-Owners Owe to Each Other in Private Companies under Texas and Delaware Law
This article focuses on conflicts among minority and majority owners of privately-held companies. As the national economy has suffered since at least 2008, lawsuits by minority owners in private companies appear to be increasing. This article does not include a statistical analysis of this trend, but the common sense explanation is that a down economy eliminates, or sharply reduces, the prospect for minority owners in private companies to cash out. As a result, many investors/owners in private businesses have become frustrated by their inability to monetize their investments.
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.
Shareholder Oppression in Texas
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. Moreover, there is a statutory basis for the doctrine in Texas, as shareholders are given the right to petition for receivership, liquidation,or less harsh remedy on the grounds of oppressive conduct by A directors or those in control. Because the shareholder oppression doctrine potentially alters a number of fundamental legal principles, it is critically important to be familiar with the doctrine's operation in close corporation disputes.
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.
When anonymous identities have to be disclosed in shareholder transactions under proposed revised rules.
Under what circumstances should a person have to disclose their anonymous digital identity?