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New Definitions of Shareholder Abuse on the Horizon

Walter Williams - Tuesday, May 20, 2014

Once a company is owned by more than one person, there are a series of rights and responsibilities that go along with that shared ownership. Under Texas law, shareholders who do not control a company have the right to be treated fairly by the majority shareholder or controlling group of shareholders. 


As one might expect given the growing economy and the broad definition, shareholder oppression litigation has exploded in Texas. 


In Ritchie v. Rupe, 339 S.W.3d 275, 289 (Tex. App.--Dallas 2011, pet. granted), the Dallas Court of Appeals used the well-known definition of minority shareholder oppression:


“The term is expansive and covers a multitude of situations dealing with improper conduct; thus a narrow definition would be inappropriate.Texas courts have generally recognized two non-exclusive definitions for shareholder oppression:


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 join the venture; 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.”

This scrutiny is heightened when the company is a small or closely held corporation. In that case, "Courts take an especially broad view of the application of oppressive conduct to a closely [ ]held corporation, where oppression may more easily be found." Id. at 290; citing Davis 754 S.W.2d at 381.


The Texas Supreme Court granted the petition last year and heard argument earlier this year. Two other shareholder oppression cases from the Dallas Court of Appeals will likely be decided at the same time. 


The decisions are expected to come down this summer. The Court will have the opportunity to further define the scope of a minority shareholder oppression claim, decide if shareholder oppression is a fact question or a legal question for the court. 


Given the conservative makeup of the Court and the relatively weak facts supporting oppression in the Ritchie v. Rupe case, we can expect that the Court will reverse the lower courts and perhaps render a decision in favor to the defendant and to narrow the scope of shareholder oppression claims.


However the Court decides, don’t expect the number of shareholder oppression cases filed in Texas to taper off any time soon.  


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