Texas Business Dispute Blog

Monday, February 16, 2015

The Fat Lady Has Not Yet Sung – Stay Tuned for the Result of Ritchie v. Rupe on Remand – Ms. Rupe May Still Prevail on her Breach of Fiduciary Duty Claim

By John Tancabel (Dallas)

An important chapter still remains to be written in the Ann Rupe saga: a chapter that could have major import for investors in Texas private companies.  As discussed in our previous Posts, Ms. Rupe, a minority shareholder in a private Texas corporation with no contract exit right, was able to obtain a court-ordered buyout at trial on her shareholder oppression claim.  Ms. Rupe’s trial court victory was affirmed on appeal, but then reversed and remanded last year by the Texas Supreme Court in Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014).  As the Dallas Court of Appeals considers the case on remand, Ms. Rupe, and other similarly situated minority shareholders in Texas, may still have the last laugh.

The Court’s Ritchie opinion sharply curtailed the claim for shareholder oppression by holding that trial courts had no authority to order buyouts of minority shareholders based on a finding of oppression.  Instead, after heightening the legal standard for proving oppression, the Court held that the sole relief available for oppression is the appointment of a rehabilitative receiver.  In Ritchie, the Court held that shareholder oppression occurs only when directors and officers of a company “abuse their authority over the corporation with the intent to harm the interests of one or more shareholders, in a manner that does not comport with the honest exercise of business judgment, and by doing so create a serious risk of harm to the corporation.”  If the Court didn't kill shareholder oppression claims outright, it left them on life support. 

Ritchie is now on remand to the Dallas Court of Appeals to consider Ms. Rupe’s remaining claim for breach of fiduciary duty.  A favorable ruling on Ms. Rupe’s fiduciary duty claim may render the Richie decision a short, pyrrhic victory for majority owners.  The briefing on remand has now closed, and there are several issues before the appellate court that could drastically rebalance the power between Texas private company majority and minority owners:

Key Issues on Remand:

  1. Whether a court-ordered buyout of a minority owner’s interest is an available remedy    under the trial court’s equitable powers upon a finding of breach of fiduciary duty
  2. Whether a majority shareholder (or a group of shareholders holding a majority of the company’s stock) owe a fiduciary duty to minority shareholders directly as a result of   their domination and control of the company

If the court of appeals decides both of these issues affirmatively, it would restore to minority owners significant rights they were deprived of by the Supreme Court's Ritchie decision.  Under current Texas law, officers and directors owe fiduciary duties as a matter of law to the company but they do not owe these duties to individual shareholders.  Therefore, in most pre-Ritchie cases, minority owners did not rely on fiduciary duty claims and, instead, they filed suit seeking court-ordered buyouts of their minority interest claiming that they had been oppressed by the majority owners.  In most of these cases, a single majority shareholder or a group of controlling shareholders did, in fact, dominate and control the company’s affairs.  Thus, if a majority owner's domination and control of the company creates a fiduciary duty to the minority owners, this would be a highly notable legal development.  It would impose on majority owners a direct duty of care, loyalty, and good faith to minority shareholders.  Arguably, the kinds of conduct that contravened the old pre-Ritchie shareholder oppression standards—“reasonable expectations” or “fair dealings”—would also constitute a breach of fiduciary duty to the minority shareholders.  

Even if the Court of Appeals rejects the concept of a fiduciary duty owed by majority owners based on their domination and control of the business, providing minority owners with a buyout right based on breach of fiduciary duty would also be of great significance.  This holding would also help to rebalance the rights of minority owners and would provide them with a means to exit the business when majority owners violate their fiduciary duties to the company.  It would restore the exit right for minority owners the Supreme Court suddenly removed in Ritchie.

For a minority owner to prove a breach of traditional fiduciary duties—those directors and company officers owe to the corporation—they must typically establish that the majority owners engaged in some sort of self-dealing that is not protected by the business judgment rule.  Proving self-dealing or intentional misconduct by the majority owners is more difficult for minority owners than establishing a claim for oppression under the pre-Ritchie standard, but it is not rare for directors and officers of closely held companies to engage in self-dealing.  Certainly, a holding by the Dallas Court of Appeals that authorizes a minority owner to obtain a court-ordered buyout of the minority interest based on a breach of fiduciary duty will result in significantly increased scrutiny of conduct y majority owners. 

The legacy of and ultimate result in Ritchie now hinges on the scope of a legal claim—breach of fiduciary duty—that has been often overlooked by minority owners in private Texas companies.  Whether or not the appellate court preserves the jury’s decision to award a buyout of Ms. Rupe’s minority interest on the basis of her fiduciary duty claim remains a subject of intense interest.  We look forward to reviewing and analyzing the Court’s decision later this year. 


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