The Ritchie v. Rupe court of appeals opinion was a significant examination of the former Shareholder Oppression Doctrine. It was reversed by the Supreme Court, but its analysis of nature of a shareholder's reasonable expectations will be important as the lower courts develop other legal theories to protect these expectations, rights, and interests and fill the gaps left by the Supreme Court.

Shareholder's reasonable expectations

Defining Reasonable Expectations

A Dallas Court of Appeals opinion in Ritchie v. Rupe, affirming a buy-out order in a shareholder oppression case broke new ground in the analysis of reasonable expectations under Texas law.  In that case, a minority shareholder wished to cash out her shares and offered them to the corporation.  The majority shareholders, who controlled the board of directors, had no desire to purchase but eventually offered the minority shareholder a price of about half of book value.  The minority shareholder then retained a broker to market the shares to third-party buyers, offering the shares at approximately 85% of book value. The majority shareholders/directors did nothing overtly to thwart a sale, but refused to communicate with or meet with any prospective buyers.  At trial, the broker testified that any prospective purchaser would expect to meet with management as part of ordinary due diligence before investing in a closely-held corporation, and that the majority shareholders' refusal to meet with prospective purchasers made it impossible to sell the stock. The trial court held that the refusal to meet with prospective purchasers was oppressive and the court of appeals affirmed.

The Dallas Court of Appeals utilized the two-part definition of 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.

The court noted that the definition is "expansive and covers a multitude of situations dealing with improper conduct," and that the two parts of the definition "are not mutually exclusive; depending on the facts of the case, conduct could be oppressive under either or both definitions."

General and Specific Reasonable Expectations

In analyzing the conduct of the majority under the "reasonable expectations" test, the court held that there are two types of "reasonable expectations": "specific" expectations that "require proof of specific facts giving rise to the expectation in a particular case and that the expectation was reasonable under the circumstances and central to the decision to join the venture," and"general" expectations "that arise from the mere status of being a shareholder," and which "belong to all shareholders" as a matter of law, "absent evidence to the contrary."

The court's analysis is logical and persuasive; however, it is somewhat at variance with the literal statement of the definition.  The definition of the kinds of reasonable expectations that are protected by the shareholder oppression doctrine contains three elements: (1) that the minority shareholder actually has a particular expectation at the time of joining the venture, (2) that the expectation is "reasonable under the circumstances" and (3) that the expectation was "central to the minority shareholder's decision to join the venture."  The statement of the definition requires that the proof of these elements be "objectively viewed." This is something of a puzzle because the first and third elements are clearly subjective questions.  The literal statement of the definition would seem to indicate that there must be proof that the minority shareholder actually had a expectation at the time of joining the venture and that the expectation was both objectively reasonable (presumably both at the time of joining and at the time it was substantially defeated) and that the expectation was of sufficient importance in the mind of the minority shareholder that it was "central" to the decision to join the venture.  If pressed to the logical conclusion, the definition would seem to exclude any reasonable expectations on the part of persons who received stock as a gift or inheritance, because there was no "decision" to join.

The definition would also exclude expectations that developed as a result of evolving circumstances—e.g., there may have been no expectation that dividends would be paid when the venture began and had no money, but that expectation might have come into being over the years following.  Also, general expectations, such as the right to vote, attend meetings, have access to information, etc., that were either taken for granted or not even considered by the minority shareholder at the time the corporation was formed would hardly have been "central" to the decision to join.  However, the application of the definition in Texas case law has not pressed the woodenly literal meaning of the terms. The judicial gloss put on the definition by the Dallas Court of Appeals certainly makes the definition much more flexible and realistic in its application.  As to general expectations that would arise from merely being a shareholder, the court held that the law presumes, absent evidence to the contrary, that all shareholders had these expectations, that they are reasonable, and that they are central.  The court, in dicta, even allows for reasonable expectations that "may develop over time among the shareholders of a particular corporation."

The most common specific expectations are the expectation of participation in management (such as a seat on the board of directors) and continued employment. Specific expectations are "personal in nature" and arise from express or implied agreements or expectations that are part of the transactions forming a particular corporation. "Thus, specific reasonable expectations require proof of specific facts giving rise to the expectation in a particular case and that the expectation was reasonable under the circumstances and central to the decision to join the venture."

General Reasonable Expectations as Shareholder Rights

General reasonable expectations, on the other hand, require no specific proof and are presumed as a matter of law "based on mere status of being a shareholder."  According to the Dallas Court of Appeals: "Some examples of general reasonable expectations are the right to proportionate participation in earnings, the right to any stock appreciation, the right (with a proper purpose) to inspect corporate records, and the right to vote if the stock has [voting] rights." "These categories, while helpful, are not rigid. For example, if in a particular closely held corporation the corporate earnings are distributed in the form of salary and employment benefits rather than dividends, continued employment could be a general reasonable expectation of all shareholders because employment is the means by which they share in the corporation's earnings."To the list of general expectations must be added the expectation of being acknowledged as a shareholder. In Davis v. Sheerin, the court held that an attempt by the majority shareholder to deprive the minority shareholder of his ownership interest in the corporation by refusing to acknowledge that he was a shareholder, even though the attempt was ultimately unsuccessful and resulted in no damages, violated the shareholder's rights and interests in the extreme, because such conduct"not only would substantially defeat any reasonable expectations appellee may have h
ad … but would totally extinguish any such expectations." Finally, to this list of general expectations, the Dallas Court of Appeals has added the right of a minority shareholder to sell her stock to any party of her choosing at a mutually acceptable price, absent any valid restrictions on alienability or limitations on that right by contract. These "general reasonable expectations" are really nothing more than minority shareholder rights, which are still protected by the law even after the Supreme Court's reversal of the Ritchie decision.