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Filling in the Gaps: Shareholder Oppression After Ritchie V. Rupe: Part 1

On June 20, 2014, the Texas Supreme Court’s decision in Ritchie v. Rupe1 initiated a seismic shift in Texas law governing the protection of minority shareholders in closely-held corporations and limited liability companies. After almost thirty years of steady appellate court development of a judicial remedy for oppressive conduct against minority shareholders, recognizing the trial court’s power to force an oppressive controlling shareholder to purchase the oppressed minority shareholder’s stock for a fair value, the Texas Supreme Court suddenly announced that no common law cause of action for oppression existed and that Texas courts had no power to order a buy-out under the statutory remedy for oppression. Three dissenting Justices accused the majority of “extinguish[ing] meaningful protections for minority shareholders.” A host of academic articles and continuing legal education papers from practitioners both decried and applauded the demise of the shareholder oppression doctrine. The gloomy assessment: “In the wake of Ritchie, minority shareholders are already having a much tougher time in the courts.”

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.

Shareholder Agreements: Drafting and Analysis

Under the Texas Business Organizations Code (the “TBOC”), there are three kinds of shareholders agreements for a Texas for-profit corporation. First, there are shareholders agreements between the corporation and one or more of the corporation’s shareholders or agreements between two or more shareholders that are not executed by all of the shareholders of the corporation. The TBOC has no specific provisions governing this first kind of shareholders agreements other than to state that the statutory provisions governing the other two kinds of shareholders agreementsdo not prohibit or impair such agreements. Second, there are written shareholders agreements that are executed by all of the shareholders at the time of the agreement and made known to the corporation. Third, there are shareholders agreements that are contained in the certificate of formation or bylaws if approved by all of the shareholders at the time of the agreement. The latter two forms of shareholder agreements are authorized and governed by Subchapter C of Chapter 21 of the TBOC. These latter agreements may be amended only by all of the shareholders at the time of the amendment, unless the agreement provides otherwise.4 This article refers to the latter kinds of shareholders agreements as “statutory shareholders agreements”.