Shareholders in a corporation all have certain rights that protect their participation in running the business. However, not all shareholders are equal; a shareholder’s power is tied to the number of shares of stock they possess. A small number of majority shareholders can have almost complete control while ignoring the minority shareholders’ rights.
Corporations with a shareholder agreement avoid these issues because the agreement covers the rights, obligations, and remedies for shareholders. But what happens when a corporation does not have a shareholder agreement? Minority shareholders seeking to right the wrongs of their fellow shareholders must look to the law for support.
Unfortunately, Texas law surrounding minority shareholder oppression is fairly complex. While shareholder oppression is a problem that many minority shareholders face, Texas law does not recognize shareholder oppression as a standalone cause of action. While there are still some options, the need for a Texas business law attorney exists now more than ever for minority shareholders oppressed by majority shareholders in their corporation.
What Is Minority Shareholder Oppression?
Simply put, minority shareholder oppression happens when minority shareholders cannot fully exercise their rights because they possess too few shares. This type of oppression is most common in small, closely held corporations.
Although there are a few definitions, a corporation is generally considered “closely held” if a small number of shareholders hold more than half of its shares. Additionally, the business relationships between these shareholders are often more personal than you might find in a publicly traded company. As a result, hostility is much easier to direct at a particular shareholder.
For example, suppose there is a corporation with only four shareholders. Suppose further that three of those shareholders own 85% of the corporation’s shares, and the remaining shareholder owns the last 15%. In that scenario, the three majority shareholders have ample opportunity to oppress the fourth. This is especially true if the majority shareholders have closer personal relationships with each other.
Examples of Minority Shareholder Oppression
Even though minority shareholder oppression is a broad term that covers a variety of majority shareholder actions, there are a few common forms it takes. Specific types of minority shareholder oppression include:
- “Freezing out” the minority shareholder by leaving them out of important decisions or otherwise excluding them from a meaningful role;
- “Squeezing out” the minority shareholder by forcing the minority shareholder to sell their shares for less than they are worth;
- Attempting to dilute the minority shareholder’s voting rights;
- Denying minority shareholders access to financial records; and
- Refusing to pay dividends to minority shareholders.
Unfortunately, minority shareholders subject to oppressive behavior by the majority shareholders are not always able to stop the oppression easily. This is partially due to how Texas law treats shareholder oppression.
Minority Shareholder Oppression Texas Law
Prior to 2014, minority shareholders in Texas could force oppressive majority shareholders to buy them out. In other words, a minority shareholder could terminate their association with the corporation and receive fair compensation.
That all changed with a ruling by the Supreme Court of Texas on a case called Ritchie v. Rupe. Ritchie involved a scenario very similar to the example mentioned above: three shareholders in a closely held Texas corporation owned 82% of the voting rights. The fourth shareholder, Ann Rupe, owned the remaining 18%. When she attempted to sell her shares back to the company, the other three shareholders became hostile and refused to make a fair offer. Subsequently, Ms. Rupe tried to sell her shares to a third party. Once again, however, the three majority shareholders did not cooperate, refusing to meet with any potential buyers.
Ms. Rupe took legal action to compel the company to buy out her shares. Although Ms. Rupe received a favorable ruling from both the trial court and the appeals court, the Supreme Court of Texas was not so generous. The court reversed the lower court rulings, ultimately deciding that a court-ordered buyout of an oppressed shareholder’s stock was not a remedy recognized by Texas law.
The ruling in Ritchie severely limited the ways an oppressed shareholder could seek relief. In addition to closing the door to buyout as a remedy, the ruling protects majority shareholders from liability for oppression unless their conduct is harmful to the corporation.
Remedies for Texas Minority Shareholder Oppression
Following the Ritchie decision, minority shareholders have only limited options when it comes to remedying oppression by majority shareholders. Chief among them is filing a derivative lawsuit. In corporate law, shareholders are permitted to file a direct lawsuit or a derivative lawsuit against the company. Shareholders file direct lawsuits when the corporation, acting through its directors, violates a duty owed to the shareholder.
A derivative lawsuit, on the other hand, is a claim brought by a shareholder on behalf of the corporation. Because the law treats a corporation like a person, the corporation has its own rights. Of course, corporations are merely legal entities, and therefore they cannot enforce these rights on their own. When a shareholder brings a derivative lawsuit, that shareholder is seeking to enforce the corporation’s rights when other leadership within the corporation refuses to do so.
Under the Texas Business Organizations Code, shareholders in closely held corporations can file derivative lawsuits in response to majority shareholder oppression. These lawsuits are usually based on breach of fiduciary duty by the oppressive shareholders.
Because they are not based on injury to the shareholder, derivative claims are not a one-to-one replacement for pre-Rupe oppression claims. Nevertheless, they offer a way for oppressed shareholders to take legal action against oppressive majority shareholders.
Hire a Texas Business Attorney Today
If you’re involved in a business dispute, hiring a business law attorney is the easiest way to resolve it. The Curley Law Firm has over ten years of experience working with businesses of all sizes to resolve virtually any legal issue efficiently and effectively. Contact us today to schedule a free case evaluation.