Shareholder Oppression Blog

What is stock in a corporation?

Capital Stock

The defining characteristic of a corporate legal structure is that its ownership is in the form of stock. The “capital stock” collectively refers to everything in which that entity has an interest, which the courts analogize to a trust fund made up of the assets, opportunities, and business operations of the corporate enterprise. See, e.g., Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. 831, 832 (Tex. Comm'n App. 1919) (“The term ‘capital” is used to designate that portion of the assets of a corporation, regardless of their source, which is utilized for the conduct of the corporate business and for the purposes of deriving therefrom the gains and profits.”); Dewing v. Perdicaries, 96 U.S. 193, 196 (1877) (“The capital stock and all the other property and effects of a corporation are a trust fund.”). The capital stock is divided into shares, which are owned by shareholders or stockholders. Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. at 832 (“The shares of stock are the intangible interests in the corporate business owned by the individual shareholders.”).

Shares of Stock

“‘Share’ means a unit into which the ownership interest in a for-profit corporation, professional corporation, real estate investment trust, or professional association is divided, regardless of whether the share is certificated or uncertificated.” Tex. Bus. Orgs. Code § BOC § 1.002 (80). “In order to bring into existence the relationship of stockholder to a corporation there must be some sort of contract in which the subscriber obtains the right to demand and exercise the privileges of a shareholder.” Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. at 832.

Each share of stock is an undivided, proportional ownership interest in the common fund. Id. (each share represents a “definite interest in the common fund existing in the individual”); Dewing v. Perdicaries, 96 U.S. at 196 (shares represent “aliquot parts of the trust fund”); Farrington v. State of Tennessee, 95 U.S. 679, 687 (1877) (“Each share represents an aliquot part of the capital stock.”). See also Auto. Mortg. Co., 266 S.W. at 135 (“It is generally agreed that shares in an incorporated company are the aliquot parts of the capital stock, and merely give to the owner a right to his share of the profits of the corporation, while it is a going concern, and to a share of the proceeds of its assets, when sold for distribution in case of its dissolution and winding up.”) (quoting Presnall v. Stockyards Nat’l Bank, 151 S. W. 873, 876 (Tex. Civ. App.—Texarkana 1912), aff’d, 194 S. W. 384 (Tex. 1917)). However, ownership of the fund itself and ownership of the partial interest in that fund are completely different things. Auto. Mortg. Co., 266 S.W. at 135 (“Shares of stock in a corporation are a species of personal property, belonging to the holder thereof, entirely separate and distinct from the property of the corporation itself.”); Farrington, 95 U.S. at 686 (“The capital stock [i.e., the corpus of the trust fund] and the shares of the capital stock are distinct things.”). The “possession of the stock evidenced by the certificate does not pass from, but is retained by, the corporation.” Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. at 832. The corporation owns the capital stock collectively. Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 645 (Tex. 1996); see also McAlister v. Eclipse Oil Co., 98 S.W.2d 171, 176 (Tex. 1936) (“Under our authorities the corporation is a legal entity, distinct from its stockholders. In this regard, strictly speaking, the ownership of the corporate assets is vested in the corporation itself and not in its stockholders.”); Hicks v. State, 419 S.W.3d 555, 558 (Tex. App.—Amarillo 2013, no pet.) (“It has long been the law that a stockholder owns an interest in the company but not the assets of the company. Rather, the assets, including the cash residing in corporate bank accounts, are owned by the corporation, and the latter is a separate legal entity from its shareholders.”). But the corporation owns the stock as a trustee for the benefit of the shareholders. Dewing, 96 U.S. at 196 (“The corporation owns and holds [the trust fund] as a trustee.”); Farrington, 95 U.S. at 686 (“It is a trust fund, held by the corporation as a trustee.”); Farrington, 95 U.S. at 687 (“Every [stock]holder is a cestui que trust to the extent of his ownership.”); McAlister, 98 S.W.2d at 176 (“Also, strictly speaking, the ownership of the stock does not carry with it the equitable title to the corporate property. This simply means, however, that the stockholders have no right to require the corporation to convey to them the legal title to the corporate property. In a larger or real sense the stockholders of a corporation are the beneficial owners of its corporate properties.”).

Personal Property

Shares of stock are personal property, and the stockholder is a property owner. TEX. BUS. ORGS. CODE ANN. § 21.801 (West 2006) (“Except as otherwise provided by this code, the shares and other securities of a corporation are personal property.”); Engel v. Teleprompter Corp., 703 F.2d 127, 131 (5th Cir. 1983) (“Under Texas law, shares of corporate stock are personal property.”); Capital Parks, Inc. v. Se. Advert. & Sales Sys., Inc., 864 F. Supp. 14, 16 (W.D. Tex. 1993) (“The shares of corporate stock, on the other hand, are the personal property of the shareholders.”), aff’d sub nom., 30 F.3d 627 (5th Cir. 1994); Barnhill v. Automated Shrimp Corp., 222 S.W.3d 756, 764 (Tex. App.—Waco 2007, no pet.) (“By virtue of owning shares of stock in a Texas corporation, Barnhill maintains personal property in Texas.”); Brosseau v. Ranzau, 81 S.W.3d 381, 387 (Tex. App.—Beaumont 2002, pet. denied) (“In Texas, stock is considered personal property, even when the underlying corporation itself owns real property.”); Evans v. Prufrock Rests., Inc., 757 S.W.2d 804, 805–806 (Tex. App.—Dallas 1988, writ denied) (“[T]he transaction was the sale of a personalty rather than realty. . . . It is a well established fact that the sale of stock is personalty not real estate.”); Griffith v. Jones, 518 S.W.2d 435, 437 (Tex. Civ. App.—Tyler 1974, writ ref’d n.r.e.) (“Shares of corporate stock are personal property in the nature of choses in action.”); Benson v. Greenville Nat’l Exch. Bank, 253 S.W.2d 918, 928 (Tex. Civ. App.—Texarkana 1952, writ ref’d n.r.e.) (“Without any attempt at historical review, we think it is now well settled that shares of corporate stock are personal property in the nature of choses in action”); Auto. Mortgage Co. v. Ayub, 266 S.W. 134, 135 (Tex. Comm. App. 1924) (“While not negotiable, shares are freely assignable, and in this respect resemble negotiable choses in action and tangible property rather than other nonnegotiable choses in action.”); Bergin v. Bergin, 312 S.W.2d 409, 412 (Tex. Civ. App.—Texarkana 1958), rev’d on other grounds, 315 S.W.2d 943 (Tex. 1958) (“Corporate stock, which is personalty, is involved.”). Shares of stock in a corporation are a species of personal property, belonging to the holder thereof, entirely separate and distinct from the property of the corporation itself. They are the subject of barter and sale the same as other personal property. Under our laws they are subject to taxation, may be impounded by garnishment proceedings, and may be sold under execution as other personal property. They are the intangible interests of the individual shareholders in the corporate business, while the tangible property belongs to the corporation. Auto. Mortg. Co., 266 S.W. at 135.

Whenever a client comes to us with a concern about how they are being treated as a shareholder or how the corporation is being run, the first thing we ask for is the “governing documents” of the corporation. These are the certificate of formation (formerly called the articles of incorporation) and the buy-laws.

The governing documents of a domestic corporation consist of its certificate of formation and the other documents or agreements adopted by the corporation to govern the internal affairs of the corporation.Texas Business Organizations Code Sec. 1.002(36) (“Governing documents” means: (A) in the case of a domestic entity: (i) the certificate of formation for a domestic filing entity or the document or agreement under which a domestic nonfiling entity is formed; and (ii) the other documents or agreements adopted by the entity under this code to govern the formation or the internal affairs of the entity).

These agreements set up the ground rules for governing and running the corporation. The certificate and by-laws are binding on all shareholders and can make a great difference in the rights of shareholders and the responsibilities of officers and directors.

Sometimes, shareholder agreements, buy-sell agreements, contractual stock restrictions, and similar contracts among the shareholder or between the corporation and the shareholders are also part of the governing documents

In prior blog posts, we have dealt with the issue of shareholder oppression that ends in a stock redemption. While generally majority shareholders do not owe fiduciary duties to minority shareholders, there is an important exception to that rule. When the corporation purchases the shares of one of its owners, then there are fiduciary duties owed to the minority shareholder by the corporation.

An important subset of stock redemptions involves those buy-outs that are the result of buy-sell clauses in a stockholders’ agreement or company agreement. A carefully-crafted buy-sell agreement can be an important contractual protection against oppressive conduct. The Texas Supreme Court in the Ritchie v. Rupe opinion repeatedly emphasized that foresight and contractual protection at the time of investment are the primary (and in many cases only) protection that minority shareholders have against oppression. However, even fair buy-sell agreements can be manipulated in unfair ways by majority shareholders. Let us take a hypothetical example of a buy-sell agreement that would be fair to all—an extremely rare phenomenon. Such a buy-sell would be mandatory upon a triggering event, not optional. And the triggering event would be something that either the majority or the minority would be able to invoke. An example of a fair buy-sell agreement would be one in which the sale occurred automatically upon the termination of employment, and either the shareholder-employee or the corporation could terminate the employment at will. Furthermore, the price for the buy-out would need to be set by an independent, third party appraiser. If the majority shareholder decided to oppress the minority shareholder, then the minority could invoke the buy-sell and be paid a fair price. If the majority and the minority could no longer get along, then the majority could invoke the buy-sell and cash out the minority. The minority might not like being involuntarily removed from the corporation, but at least he would be paid a fair price—which is the most he could expect from a shareholder oppression lawsuit.

Such a buy-sell agreement would seem to eliminate the motivation for shareholder oppression and to provide an effective remedy for dissension among shareholders. Now, drop that ideal agreement into the real world. Even a buy-sell agreement that is carefully thought out and fairly crafted can still be abused. Majority shareholders have inside knowledge of the corporation and its business and are in a position of absolute control. They may manipulate even the fairest buy-sell agreement to achieve an unfair result. One example would be if the majority shareholder had negotiated a highly lucrative sale of the company or investment into the company. The majority shareholder might trigger the buy-sell before the sale or investment became effective or known and thus cheat the minority shareholder out of the profits on the sale. Similarly, a company might have received (or believe that it will receive) a major contract that will greatly increase the value of the company. An unscrupulous majority shareholder might very well trigger the buy-sell before the new business was known. A majority shareholder might also have inside knowledge that new technology or other developments would in the near future increase the value of the company, and trigger the buy-sell before that increase became apparent. Finally, in highly cyclical industries such as the oil and gas industry, the majority shareholder might time the buy-out at the bottom of the cycle, just as oil prices were beginning to rise, so as to minimize the buy-out price.

The question is whether the fiduciary duties that companies have in a stock redemption provide any protection against such manipulation. In Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, the company redeemed a minority shareholder’s interest. The redemption price was based on a recent appraisal, but the majority shareholder knew that the appraisal was already out of date because developments in fracking technology were about to greatly increase the value of the company’s oil and gas property holdings. In the event, the company a short time later sold for almost twenty times the value used for the redemption price. Id. at 367. The court held that the majority shareholder owed formal fiduciary duties to the minority shareholder in the redemption. Id. at 392.

We conclude that there is a formal fiduciary duty when (1) the alleged fiduciary has a legal right of control and exercises that control by virtue of his status as the majority owner and sole member-manager of a closely-held LLC and (2) either purchases a minority shareholder’s interest or causes the LLC to do so through a redemption when the result of the redemption is an increased ownership interest for the majority owner and sole manager.

Promoters

The role of the “promoter” is a bit of an anachronism under the Business Organizations Code. Dean Hildebrand defined a promoter as “one who brings together the persons who become interested in the enterprise, aids in procuring subscribers, and sets in motion the machinery which leads to the formation of the corporation itself. The term involves the idea of exertion for the purpose of getting up and starting a company ….”1 Ira P. Hildebrand, The Law of Texas Corporations § 187 (1942). Traditionally, the promoter would undertake to bring together all that was necessary for the corporate enterprise: capital through subscriptions of investors, and assets, equipment, personnel, leases, etc. And the corporation would be formally organized only once all of this was assembled and ready to go.20 Tex. Prac., Business Organizations § 26:7 (3d ed.). Under modern practice, incorporation usually happens first and all of the activity traditionally undertaken by promoters takes place under the auspices of the corporation through its officers and agents. Legal issues relating to the authority and liability of the promoter only occur when activity in anticipation of the formation of a corporation precedes the filing of the certificate of formation.

Promoter authority and liability

When the business is organized in advance of the incorporation, questions often arise as to the authority of the promoter to bind the corporation to contractual commitments entered into prior to the corporation’s existence. The promoter enters into a contract or lease on behalf of the to-be-formed corporation; however, the promoter “could not act as agent for a nonexistent corporation. A nonexistent corporation can have no agent.”Fish v. Tandy Corp., 948 S.W.2d 886, 897 (Tex. App.—Fort Worth 1997, writ denied). “A promoter, though he purport[s] to act on behalf of the projected corporation, and not for himself, cannot be treated as agent, because the nominal principal is not then in existence ....”Weatherford, Mineral Wells & Nw. Ry. Co. v. Granger, 86 Tex. 350, 24 S.W. 795, 796 (1894). See Cator v. Commonwealth Bonding & Cas. Ins. Co., 216 S.W. 140, 142 (Tex.Com.App.1919, judgm't adopted); Weatherford, M.W. & N.W. Ry. Co. v. Granger, 86 Tex. 350, 353, 24 S.W. 795, 796 (1894); Cavaness v. General Corp., 272 S.W.2d 595, 598 (Tex.Civ.App.—Dallas, 1954), aff'd, 155 Tex. 69, 283 S.W.2d 33 (1955). See also BAC Home Loans Servicing, LP v. Texas Realty Holdings, LLC, 901 F. Supp. 2d 884, 921–22 (S.D. Tex. 2012) (“In Texas, when a promoter of a corporation enters into a contract before the corporation comes into existence, the promoter is personally liable on the contract, absent an agreement with the contracting party that the promoter is not liable.”); Byerly v. Camey, 161 S.W.2d 1105, 1110 (Tex. Civ. App.—Fort Worth 1942, writ ref'd w.o.m.) (“The promoters are not regarded as agents of the corporation later to be formed, nor are their contracts binding upon the corporation, unless made so by charter or statute, or unless assumed by the corporation.”).

If things don’t go the way the promoter anticipates, the contract is not enforceable against the future corporation. Fish v. Tandy Corp., 948 S.W.2d at 897–98 (“A promoter, though he purport to act on behalf of the projected corporation, and not for himself, cannot be treated as agent, because the nominal principal is not then in existence; and hence, where there is nothing more than a contract by a promoter, in which he undertakes to bind the future corporation, it is generally conceded that it cannot be enforced.”). In such cases, generally, the promoter is personally liable to the other contracting party. Kahn v. Imperial Airport, L.P., 308 S.W.3d 432, 438–39 (Tex. App.—Dallas 2010, no pet.) (“Likewise, one cannot sign for and bind a legal entity that does not yet exist. .... We conclude that, under the facts of this case, Kahn is personally liable on the Lease.”); Fish v. Tandy Corp., 948 S.W.2d at 898 (“Thus, notwithstanding assertions that he acted solely in contemplation of the formation of a corporation, a promoter can be personally liable for entering into a contract for an unformed corporation.”). See Stephens v. Felix Mexican Restaurant, Inc., 899 S.W.2d 309, 314 n. 9 (Tex.App.—Houston [14th Dist.] 1995, writ denied).

Texas law recognizes “the property right which a share in such a company creates.” Yeaman v. Galveston City Co., 167 S.W. 710, 719 (Tex. 1914). In Texas, property rights are “sacred and fundamental,” State v. Texas City, 295 S.W.2d 697, 704 (Tex. Civ. App.—Galveston 1956), aff’d, 303 S.W.2d 780 (Tex. 1957); Ford v. Grand United Order of Odd Fellows, 50 S.W.2d 856, 859 (Tex. Civ. App.—Beaumont 1932, writ dism’d w.o.j.) (“right to own and have exclusive dominion over private property is a sacred one”); “a foundational liberty, not a contingent privilege,” Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, L.L.C., 363 S.W.3d 192, 204 n.34 (Tex. 2012); “natural, inherent, inalienable, not derived from the legislature and as preexisting even constitutions.” Eggemeyer v. Eggemeyer, 554 S.W.2d 137, 140 (Tex. 1977).

The right to acquire and own property, and to deal with it and use it as the owner chooses, so long as the use harms nobody, is a natural right. It does not owe its origin to constitutions. It existed before them. It is a part of the citizen’s natural liberty—an expression of his freedom, guaranteed as inviolate by every American Bill of Rights.

The ancient and established maxims of Anglo-Saxon law which protect these fundamental rights in the use, enjoyment and disposal of private property, are but the outgrowth of the long and arduous experience of mankind. They embody a painful, tragic history—the record of the struggle against tyranny, the overseership of prefects and the overlordship of kings and nobles, when nothing so well bespoke the serfdom of the subject as his incapability to own property. They proclaim the freedom of men from those odious despotisms, their liberty to earn and possess their own, to deal with it, to use it and dispose of it, not at the behest of a master, but in the manner that befits free men. Spann v. City of Dallas, 235 S.W. 513, 515 (Tex. 1921).

The Texas Supreme Court has stated that “freedom itself [] demand[s] strong protections for individual property rights.” Tex. Rice Land Partners, Ltd., 363 S.W.3d at 204. Protection of those rights is “one of the most important purposes of government.” Eggemeyer, 554 S.W.2d at 140.

“[P]eople enter closely-held businesses in the same manner as they enter marriage: optimistically and ill-prepared.” Sooner or later, there is trouble in paradise. Resentments, jealousies, and disagreements always surface. In a corporation, someone always has control. Someone always winds up with the short end of the stick. What is minority shareholder oppression in Texas closely-held corporations? How do we fight it?

Minority Shareholder Oppression

Typical scenario: Two friends dream of working for themselves. Joe and Sally create a new business. They want the new company to seem legitimate. They want to limit their liability. They want to grow the business and either sell it or leave it to their children. So they incorporate. ABC, Inc. is born. Now the Joe and Sally receive stock, seats on the board of directors, fancy titles. What is it worth? Nothing. Not yet. Now comes the hard part. Joe and Sally work. They sacrifice. They spend their life savings. They go without pay. And the business starts to make money and grow. Now the shareholders each have a secure job, a decent income, and the pride of owning their own business. At last, Joe and Sally work for themselves. Or so they think.

In the beginning, Joe and Sally make decisions together and share the profits. But someone had to be the "president," right? The company was Joe's idea; he had more experience in the industry; he had the contacts. So, Joe gets 51% and the title of president. Joe manages the checkbook and makes most of the decisions. Sally works hard. Joe works hard.

Eventually, Joe begins to think that Sally is getting more than she is worth. Sally never thought of Joe as her boss but as her equal partner. Joe disagrees. Sally wants to know how Joe is spending the money. Sally doesn't want Joe to make more money than she does. Sally want to question the decisions Joe is making. Joe thinks Sally has gotten too big for her britches. Who is Sally to criticize Joe? ABC, Inc. was his idea. ABC, Inc. is the result of his hard work. Where is the gratitude? Joe doesn't need Sally any more.

Joe fires Sally, so Sally has no income. ABC, Inc. doesn't pay dividends, so Sally receives no money from the company. Sally owns 49% of ABC, Inc., which should be worth a lot of money. Sally can't sell it. Sally can't borrow against it. Sally can't do anything with it except sell it to Joe -- who might be willing to pay ten cents on the dollar.

HCWD, PLLC will speak at the 11th Annual Texas Bar CLE Essentials of Business Law Course at 9:30 am on March 13, 2020 in Houston, Texas. The topic will be Shareholder Agreements.

Download the paper that HCWD, PLLC will be presenting:

Shareholder Agreements as Mechanisms for Dealing With Shareholder Oppression

• Shareholder Oppression Overview
• Statutory Provisions Governing Shareholder Agreements
• Recent Cases
• Agreements to Control Specific Oppressive Conduct and Their Limitations
• Buy-Out Mechanisms and Their Limitations
• Abusive Use of Buy-Sell Agreements

Shareholder Agreements CLE Paper

While shareholder agreements—in particular, Buy-Sell provisions—may provide some protection for minority shareholders against shareholder oppression, ordinarily they are not. More often, the Buy-Sell provision becomes the means of oppression. Normally, the buy-sell provides the option to purchase a shareholder’s shares upon termination of at-will employment at  at book value or some other low price. In such a situation, the majority may file a minority shareholder for no reason other than to use the Buy-Sell to obtain the minority’s shares at an unfairly low price. The minority shareholder would be stuck with the (in retrospect) very unfair bargain set forth in the buy-sell. In this situation would the minority shareholder have any remedy? Perhaps.

Ritchie v. Rupe speculates: “There may be situations in which, despite the absence of an employment agreement, termination of a key employee is improper, for no legitimate business purpose, intended to benefit the directors or individual shareholders at the expense of the minority shareholder, and harmful to the corporation. Though the ultimate determination will depend on the facts of a given case, such a decision could violate the directors’ fiduciary duties to exercise their ‘uncorrupted business judgment for the sole benefit of the corporation’ and to refrain from ‘usurp[ing] corporate opportunities for personal gain.’

This claim would require a showing that the terminated shareholder was a “key employee” whose loss was detrimental to the corporation and the lack of a legitimate business purpose—as the Supreme Court notes, a very “extreme” situation and very hard to prove. Arguably, the burden of proving a legitimate business purpose would be on the majority shareholders/directors/officers that made the termination decision because they owe fiduciary duties to the corporation. It is not at all clear what the remedy would be. If the termination decision breached fiduciary duties to the corporation, then reinstatement (and backpay) to unwind the illegal transaction would obviously be available, but this remedy would leave the minority shareholder vulnerable to further oppressive conduct. The Texas Business Organizations Code would allow a minority shareholder in a closely-held corporation to request that the court treat the derivative suit as “a direct action brought by the shareholder for the shareholder’s own benefit.” This relief would be available if the court finds that “justice requires” the treatment. If so, then the action might be treated as a wrongful termination claim in which lost wages and earning capacity might be recoverable. Also, the court’s equitable authority might permit a court-ordered buy-out at a judicially-determined fair price. The Supreme Court has strongly hinted that such relief would be available under Section 21.563.

There might also be a remedy based bad faith if the exercise of the Buy-Sell for the sole purpose of obtaining the minority’s stock for grossly inadequate consideration. There is a strong argument that, in a stock redemption transaction in which the minority is divested of his property rights in his stock, the majority owes fiduciary duties directly to the minority. At least one court has held that, when a company purchases its own stock from one of its owners, unique formal fiduciary duties arise. 

In In re Fawcett, the corporation repurchased the stock of the widow of a shareholder. She later sued the corporation for breach of fiduciary duties. The court of appeals held: “An officer or director of a closely held corporation, as well as the corporation itself, may become fiduciaries to a shareholder when the corporation, officer, or director repurchases the shareholder’s stock.”

Texas Business Organizations Code section 11.314 provides that the limited liability company becomes subject to district court jurisdiction to order winding up and termination if a petitioning member satisfies one or more of three tests, which we will refer to as the “economic purpose test,” the “owner conduct test,” and the “reasonable practicability test.” 

No Texas cases have applied section 11.314 to an LLC, and only a small number of cases apply the same statute to partnerships. However, courts in other jurisdictions have applied statutes with wording essentially identical to the three tests set forth in section 11.314 to a wide variety of circumstances. Each of the three tests has been used to provide a remedy to dissension and oppression. Section 11.314 should provide meaningful relief and the possibility of a compulsory buy-out to oppressed members of Texas LLCs.

Remedy

Unlike other states in which dissolution is mandatory and the only remedy,  the Texas statute is unique. Section 11.314 provides that, if the court determines one of the three tests is satisfied, the district court “has jurisdiction to order the winding up and termination of the domestic partnership or limited liability company.”  A court with jurisdiction over an LLC presumably retains the discretion to order winding up and termination or not to do so. In fact, section 11.054 makes clear that a district court with jurisdiction to order the winding up of an LLC, in fact, has extremely broad powers to act:

Subject to the other provisions of this code, on application of a domestic entity or an owner or member of a domestic entity, a court may:

Michigan has a robust statutory remedy for shareholder oppression.

GGerald Mantese, Douglas Toering, and Fatima Mansour have just publised a fascinating new article in the January 2017 issue of the Michigan Bar Journal analyzing recent Michigan appellate decisions applying and fleshing out that remedy.

Too bad the effort to pass a similar statutory remedy for minority shareholders fell flat in 2015, with no possibility of another try in the current legislative session.

ShareholderOppression.com attempts to keep abreast of significant developments in shareholder law in all 50 states. See our brief summary of Michigan Shareholder Law.

Will the Texas Legislature Restore the Shareholder Oppression Claim?

The Texas Supreme Court's Ritchie v. Rupe decision overturned the Texas shareholder oppression doctrine. The implications for Texas law are significant. One commentator has written: "The problem is not simply that Ritchie is bad law. Ritchie is also bad policy—indeed, it may have disastrous economic effects. Although the full impact of the opinion has yet to be seen, this Essay contends that Ritchie is likely to disincentivize investment in close corporations, ramp up the frequency of shareholder oppression, and imperil the financial health of many small businesses."

Politically conservative justices on the Texas Supreme Court and lower appellate courts tend to think in terms of plaintiff vs. defendant--with the politically conservative preference being a pro-defendant, anti-plaintiff outcome. However, that narrow mindset does not always advance justice or a true conservative agenda. Refusing to protect the investments of small business owners is not really pro-business. Therefore, policy thinkers on both the left and the right of the political spectrum have been troubled by the elimination of judicial protection of small business investors, and efforts have been made in the Texas legislature to address the havoc caused by the Ritchie decision.

Texas Legislature Addresses Shareholder Oppression

The Texas Legislature convenes every two years. In the 2015 biennium, immediately following the Ritchie v. Rupe decision, Representative Ron Simmons, Vice-Chairman of the House Business and Industry Committee, proposed new remedies for cases when a board of directors is found to have oppressed a minority shareholder.

House Bill 3168, 84th Legislature, proposed that:

the court may order, in addition to any remedy authorized by this code, any legal or
equitable remedy the court determines appropriate under the circumstances, including:
(1) The appointment of a fiscal agent to periodically report to the court;
(2) The retention of jurisdiction by the court;
(3) An accounting of allegedly misappropriated funds;
(4) An injunction against the oppressive conduct;
(5) Payment of a dividend;
(6) A buyout of the minority shareholder's shares;
(7) Authorization for the minority shareholder to purchase additional stock; and
(8) Payment of damages caused by the oppressive conduct.