TEXAS SUPREME COURT REFUSES TO RECOGNIZE SHAREHOLDER OPPRESSION CLAIM

In a 6-3 decision, the Texas Supreme Court declined to recognize or create a common law cause of action for minority shareholder oppression in a closely-held corporation and held that an oppression section of the Texas Business Organizations Code (“TBOC”) does not allow a court to order a buyout of a minority shareholder’s shares.

Rupe Investment Corporation (“RIC”) qualifies as a Texas closely-held corporation under the TBOC, and plaintiff Ann Rupe served as trustee of Buddy’s Trust, which owned an 18% interest in RIC. Rupe sued RIC and its board of directors for shareholder oppression and breach of fiduciary duties after the controlling shareholders refused to authorize management to meet with prospective purchasers of the trust’s shares. A jury found in favor of Rupe, and the trial court rendered judgment concluding that RIC and its directors engaged in oppressive conduct and ordereding RIC to buyout the trust’s interest.

The court of appeals substantially affirmed that judgment, but the Texas Supreme Court reversed. Rupe first sought to uphold the trial court’s judgment on a TBOC provision that authorizes a trial court to appoint a receiver if “the acts of the directors or those in the control of the corporation are illegal, oppressive, or fraudulent.” The Court concluded that oppression under the statute requires a showing that the directors or managers “abuse[d] their authority over the corporation with the intent to harm the interests of one or more shareholders, in a manner that [did] not comport with the honest exercise of their business judgment, and by doing so create[d] a serious risk of harm to the corporation.” In adopting this definition, the Court rejected the “burdensome, harsh, and wrongful” and “reasonable expectations” tests that have been adopted by many other jurisdictions and relied upon by many Texas intermediate appellate courts. The Court determined that the directors’ conduct did not constitute oppression under the statute.

The Court also held that the trial court’s buyout remedy could not be upheld under the oppression provision because the statute permits only a single remedy, appointment of a rehabilitative receiver. The language that lower courts latched onto when ordering a buyout remedy, “all other remedies available either at law or equity . . . are determined by the court to be inadequate,” actually restricts the availability of the receivership remedy and does not expand the remedies available under the statute.

Finally, Rupe could not salvage the judgment based on a common-law shareholder oppression cause of action because the Court explicitly declined to recognize one. The Court concluded that current statutory, contractual, and common-law protections are sufficient to protect the legitimate interests of minority shareholders through protection of the corporate entity itself. Its conclusion relied heavily upon a fiduciary’s duties to the corporation, and the Court reiterated its refusal to impose upon directors and officers, absent a special relationship, a fiduciary duty to the individual shareholders. Although it recognized a gap in the protection of individual minority shareholders, it declined to fill it with a shareholder oppression cause of action because the tort “is so vague and subject to so many different meanings in different circumstances.”

The Court’s decision should provide significant insight for future interpretation of any duties or rights among majority and minority shareholders in a closely-held corporation. Ritchie v. Rupe, No. 11-0447 (Tex. June 20, 2014).