A recent Texas Court of Appeals decision in Ritchie v. Rupe, 339 S.W.3d 275 (Tex.Civ.App. – Dallas 2011, pet. filed), raises uncertainty for boards of directors and management of privately held Texas corporations that are dealing with shareholders desiring to sell shares. The case concerned a minority shareholder of a closely held Texas corporation who desired to sell shares she held as trustee of a family trust. The shares had been held for a number of years and were not subject to a shareholders’ agreement that restricted sales. The board of directors and management of the corporation cooperated in certain respects with the minority shareholder’s efforts to sell, but refused to meet with prospective purchasers of the shares.
The court held that:
- A general “reasonable expectation” of a shareholder is that, in the absence of a contractual restriction, the shareholder may freely sell its shares “to a party of [the shareholder’s] choosing at a mutually acceptable price.”
- The conduct of “directors or those in control of the corporation that substantially defeats the reasonable expectation of a minority shareholder” will often constitute shareholder oppression.
- The refusal in this case of the board and management to meet with prospective purchasers constituted shareholder oppression.
- Requiring the corporation to repurchase a minority shareholder’s shares for their fair market value was a proper equitable remedy.
The decision prompts various general questions regarding (among other matters) the scope of a shareholder’s “reasonable expectations,” the balancing of a shareholder’s “reasonable expectations” with the board’s or management’s duties to the corporation and all of its other shareholders, the scope of a shareholder-oppression claim, and the availability of a buy-out as a remedy for oppression. It also prompts a more particular question for counsel to a board or management: Is the board or management required to expose themselves and the corporation to possible federal and state securities-law claims by meeting with prospective purchasers of a minority shareholder’s shares, even if there is no statutory or contractual obligation to do so and the corporation (and its other shareholders) would not receive any benefit from the sale? From the Ritchie decision, it appears that if the board and management wish to avoid a shareholder-oppression claim, they must risk a securities-law claim.
The concern for the board and management is not that they would intentionally mislead any prospective purchaser, resulting in liability under federal and state securities laws. Instead the concern is that even if they provide information to a prospective purchaser that they believe to be accurate, there is a possibility that they and the corporation will be required to defend securities-law claims from a purchaser who becomes unhappy with his purchase or his subsequent continued ownership of the shares. Although the risk relating to securities-law claims can be limited to some extent – e.g., by a waiver of reliance from prospective purchasers or by an indemnification agreement from the selling shareholder in favor of the corporation and the board and management – the risk cannot be eliminated; and it seems odd that the corporation and (indirectly) all of its other shareholders, and its directors and management, should be required to accept that risk solely for the benefit of one shareholder.
OUR TAKE: The Ritchie decision is the subject of a pending motion for rehearing of a denied petition for review submitted to the Texas Supreme Court, and a few of the leading corporate and securities lawyers in Texas have filed amicus papers encouraging the Texas Supreme Court to accept that petition. It appears that, because of the questions that arise from the Ritchie decision, a review by the Texas Supreme Court would certainly benefit boards of directors and management of privately held Texas corporations and counsel who advise them.