Texas law governing minority shareholder rights is complex and full of traps for the unwary. Texas lawyers get it wrong every day--frequently exposing their clients to further liability. Here are ten mistakes never to make.
1. Advising clients that Shareholder Oppression law is dead.
Many Texas lawyers believe that the Ritchie v. Rupe opinion, in which the Texas Supreme Court eliminated the shareholder oppression doctrine as a legal remedy, declared open season on minority shareholders, and these lawyers mistakenly advise majority shareholders that there is no legal penalty for oppressive conduct or dissuade minority shareholders from bringing valid claims. These lawyers simply have not read the opinion very carefully. The Texas Supreme Court overruled the Shareholder Oppression doctrine, not because minority shareholders had no rights, but because the doctrine was deemed unnecessary. During the 150 years preceding the advent of the shareholder oppression doctrine, Texas courts had developed robust legal protection for minority shareholders. All of those cases are still good law. Beginning in late 1980s, Texas appellate courts distilled the legal principles in those earlier cases into a single doctrine combined with a forced buy-out remedy. That doctrine was overruled but not the legal rights and duties on which it was based.
2. Advising clients that the exercise of majority rule makes an action legal.
Many lawyers simply do not understand that the power to do something in a corporation is not the same as the right to do that thing. In a corporation, the majority rules, which means that the majority has enormous power over the corporation and can abuse that power to harm minority interests. But that is not the end of the story. The power to do something does not mean the right to do it. Officers, directors, and majority shareholders have the fiduciary duty to use their uncorrupted business judgment solely for the benefit of the corporation as an entity and the shareholders collectively (all of them). The Texas Supreme Court in Ritchie v. Rupe made very clear that the interests of the corporation are not the same thing as the interests of majority. Therefore, the mere fact that the decision was validly made by a majority tells you nothing about whether the decision violates the law.
3. Advising (or allowing) majority shareholders to deny the share ownership of a minority shareholder
Many lawyers think that it is necessary to possess a stock certificate in order to be a shareholder. Wrong, wrong, wrong. Texas law has been clear for more than a century that the certificate is merely evidence of ownership; it is not the stock itself. A person becomes a shareholder when he performs whatever consideration was required by the agreement under which he was to acquire shares. This is true even if the ownership is not recorded and no formal act of issuing shares is ever performed. If the corporation has ever acknowledged the share ownership, in its records, by permitting attendance at shareholder meetings, by reporting ownership on Form K-1 of a federal tax return, then the person is a shareholder—no take backs. Not only is the wrongful denial of stock ownership incorrect as a legal matter, taking that position in a lawsuit actually results in additional liability. The wrongful denial of stock ownership is an act of conversion and may make the corporation and the majority shareholder liable for the value of the plaintiff’s shares.
4. Withholding corporate records in response to a valid inspection request.
Texas law gives shareholders broad rights to inspect corporate records and to have knowledge of what is going on in their own company. There is almost never a legitimate reason not to be forthcoming with information to a shareholder, so long as the shareholder agrees to the protection of legitimate trade secrets. Majority shareholders usually want to withhold information out of spite or ego. Lawyers representing majority shareholders can certainly waste the corporation’s money delaying and fighting the disclosure of corporate information. They almost always lose, and subject the corporation to not only the expense of a hopeless fight but also the statutory penalty of paying the plaintiff’s attorneys fees as well.