Shareholder & Partner Disputes
Shareholder & Partner Disputes

In a landmark decision in June of 2014, the Texas Supreme Court shook the groundwork of shareholder litigation and shareholder rights in Texas with its opinion in Ritchie v. Rupe, 443 S.W.3d 865 (Tex. 2014). The decision completely did away with a common law cause of action for shareholder oppression, limiting such claims solely to a statutory cause of action under the receivership statute, Texas Business Organizations Code §11.404. Ritchie, 443 S.W.3d at 878. The practical effect of this decision was to remove the remedy of an equitable buy-out of the minority’s shares for oppression claims, leaving instead the sole remedy of the appointment of a rehabilitative receiver to remedy oppressive conduct by the governing persons. Id. at 872-77.

The court also completely re-defined the standard of conduct that could be defined as “oppressive,” moving away from the shareholder-centric tests of whether a minority shareholder’s “reasonable expectations” were substantially defeated, and instead creating a company-centric definition of oppression as conduct where “they [governing persons] 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.” Id. at 870-71.

Contrary to popular opinion, the Ritchie decision did not eradicate the rights (or more precisely the ability to seek redress for violations of the rights) of minority shareholders in Texas. While Ritchie certainly stripped away the powerful tool of a shareholder oppression cause of action that could be remedied by a forced buy-out of the minority’s shares, it nonetheless left open the possibility of a number of alternative causes of action to enforce minority shareholder rights such as claims for fraud, breach of fiduciary duty, actions for inspection of books and records, and derivative claims (which can be treated as direct claims under the closely held company statutes, Texas Business Organizations Code §21.563 and §101.463) See Id. at 879-90. The court also left the possibility of a forced buy-out of the minority’s interest as remedy for breach of fiduciary duty. Id. at 892.

The Ritchie decision has made for tumultuous times for both majority and minority interest business owners in determining the rights, duties, and remedies of interest holders, especially in closely held companies of less than 35 shareholders or members. Because the claims that are still available to minority shareholders are incredibly fact-sensitive, it can lead to insecurity in knowing what rights you have or what duties you have to fellow shareholders. Is your relationship with another shareholder the type that imposes on you an informal fiduciary duty? Do you have to give them access to the entire books and records of the company? Do you have a remedy available for infringement of your rights as an owner? These questions and more require the guidance of good counsel with the experience to know the pitfalls, the rights, and the remedies in dealing with fellow owners when disputes have arisen.

Now more than ever, the shareholder, membership, or partnership agreement between the interest holders are extremely important in defining the duties, rights, responsibilities, and remedies concerning the relationship between owners.

These highly important documents should not be approached or negotiated lightly, as they will mostly define what you have to do, what can be done to you, and what you have the right to do.

Whether you are the majority or a minority interest holder, the experienced attorneys at Rapp & Krock, P.C. may be able to assist you in your business formation, governing documents, company agreements between owners, negotiations. We may also be able to help when things go awry, and co-owners of a business become involved in pre-litigation, or litigation disputes. Often, the business you own is your livelihood, and you should strive to have every protection of that asset that you can before, during, and after disputes arise.