Texas Shareholder Oppression in the Legislature
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.
The House Business and Industry Committee heard the bill, and after considerable debate, it was left pending--meaning, that it went nowhere. The Legislature is now back in session, and the House Business and Industry Committee held hearings on the dormant bill. The committee's report has just been released, including a lengthy discussion of Ritchie v. Rupe and possible legislative attempts to restore legal protections for small business investors. (pp. 36-41).
The report includes an analysis of the Ritchie opinion, a summary of testimony by two attorneys from both the management and minority perspectives, and the recommendations of the committee. The committee concludes:
After carefully reviewing the history of Rupe v Ritchie, the committee acknowledges the difficulty the court faced both in applying the common meaning of the word oppression, and the complications that come with creating a common-law cause of action. Further, the committee wishes to thank Representative Simmons for his work to develop appropriate remedies for minority shareholder oppression cases. The committee recognizes the need for adequate protection of minority shareholders and some members believe the Ritchie v. Rupe majority decision exposes minority shareholders to potential abuse. Having received just one list of factors to consider in developing a statutory definition of oppression and additional appropriate remedies, the committee feels it has insufficient information and viewpoints to make a recommendation at this time. Should a member of the Legislature propose a bill with more specific details to address the issues, the committee believes the legislation should receive all due consideration.
In other words, don't expect a real legislative solution any time soon.
Texas Common Law Remedies for Shareholder Oppression
In the meantime, small business investors continue to be taken advantage of in Texas, and they and attorneys who represent small business owners will have to rely on the narrow range of remedies that the Texas Supreme Court has left available for Texas courts to apply and innovate under Texas common law. In addition to the shareholder derivative action, Texas shareholders may still assert claims for conversion, dividend claims, ultra vires claims, and claims to vindicate information rights. Of great interest is the revival of the breach of trust claim against the corporation, which may provide a basis for equitable remedies, including the buy-out, based on well-established duties that corporations owe to their shareholders. A major article by the author of this website tracing the history of the breach of trust cause of action and demonstrating its ability to fill in the gaps left by the Ritchie opinion will be published in the Texas Journal of Business Law in the next few weeks. An advance copy is available for download to readers of this blog.