The Texas Supreme Court recently determined that shareholder oppression claims are solely statutory causes of action that cannot support non-statutory remedies, such as a buy-out. See Ritchie v. Rupe, No. 11-0447, 2014 Tex. LEXIS 500 (Tex. June 20, 2014). Instead, shareholder oppression claims are limited to statutory claims wherein a shareholder seeks the remedy of a rehabilitative receivership.
The Court further determined that the burden of proof in statutory shareholder oppression cases is high. A shareholder can prove shareholder oppression only by showing that the corporation’s directors or managers “abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.” Thus, a party cannot prevail on a shareholder oppression claim without a showing that the corporate directors or managers intended to harm the shareholder.
Yet, the majority of the Court made clear that other common law claims and remedies remain available to protect minority shareholders. As examples, the Court stated that, among other things, minority shareholders may bring derivative suits on behalf of the corporation, or assert causes of action for (1) an accounting, (2) breach of fiduciary duty, (3) breach of contract, (4) fraud and constructive fraud, (5) conversion, (6) fraudulent transfer, (7) conspiracy, (8) unjust enrichment, and (9) quantum meruit. Thus, the Court responded to the dissent’s criticism that the rights of minority shareholders have been harmed by the Court’s decision, concluding “extensive statutory, contractual, and common-law protections that already exist under Texas law.”
The takeaway is that plaintiff’s counsel should plead shareholder oppression if there is adequate proof of intent to harm the shareholder. Otherwise, counsel should use creativity to piece together other claims and remedies that best fit the facts of the case. On the other hand, if counsel is defending a corporation from a shareholder oppression claim, counsel should fully appreciate the limitations on liability that are described in this important Supreme Court opinion.
Kathryne M. Morris