Texas Business Dispute Blog

Tuesday, April 28, 2015

A Legislative Fix is Being Considered for the Loss of Minority Shareholder Oppression Claims in Texas - the Antidote to Ritchie v. Rupe.

By Ladd Hirsch (Dallas)

When the Texas Supreme Court decided last year (in a 6-3 decision) to jettison decades of appellate case law and deprive minority shareholders of the right to bring claims for shareholder oppression against majority owners, the case generated extensive comment, including in our previous Blog Posts.  See Ritchie v. Rupe, No. 11-0447, 2014 WL 2788335, at *10 (Tex. June 20, 2014); read more.  In reaching its decision in Ritchie, the Court reinterpreted a long-existing Texas statute in a novel way adverse to the interests of minority shareholders.   The far-reaching impact of the Ritchie decision continues to generate comment and also pointed criticism, most notably from the Yale Law Journal.

This Essay argues that Ritchie v. Rupe was wrongly decided. The majority’s puzzling interpretation of the Texas Business Organizations Code cannot be squared with either the plain language of the statute or with accepted canons of statutory interpretation. But the problem is not simply that Ritchie is bad law. Ritchie is also bad policy — indeed, it may have disastrous economic effects.  Although the full impact of the opinion has yet to be seen, this Essay contends that Ritchie is likely to disincentivize investment in close corporations, ramp up the frequency of shareholder oppression, and imperil the financial health of many small businesses. For these reasons, other states should hesitate before following Ritchie.

The Future of Shareholder Oppression, Yale Law Journal, Vol. 124 2014-2015.

Recently, a new bill introduced in the Texas legislature seeks to undo the effect of the Ritchie decision and makes it clear that the concerns about the case have not abated.  A copy of House Bill 3168 is attached at the end of this Post.

No predictions of the ultimate success/failure of the Bill are presented in this Post, and as of April 14, 2015, it remains pending before the Business and Industry Committee after it was first introduced on March 11, 2015. Nevertheless, the substance and origins of the proposed new Bill are interesting in a number of respects.

First, the Bill was authored by Rep. Ron Simmons, a second term Republican from Denton County.  Rep. Simmons is the Chairman and founder of a large Financial Advisory Firm managing more than $1.5 billion in assets; he is a conservative legislator with significant business experience who has received high rankings from conservative groups, e.g., the Eagle Forum and Texans for Fiscal Responsibility.  Thus, this Bill is being sponsored by a pro-business, conservative legislator.

Second, if the Bill was passed by the legislature, it would be narrower in some respects and broader in others than the pre-Ritchie legal landscape.  The Bill would be narrower in that it would apply only to closely-held companies rather than to all private companies in Texas as the statute may require companies to follow statutory procedures to be considered closely held.  The provisions of the Bill are broader than the pre-Ritchie state of the law that applies to minority shareholders, because it grants an array of broad statutory powers to trial courts, including the right to appoint a “fiscal agent” to report periodically to the court on the operations of the business.  This new statutory agent is something different than a receiver and presumably is more of a monitor.

Finally and interestingly, the new Bill would provide the oppressed minority shareholder with more than the mere right to obtain a buyout of its ownership interest or the right to obtain a dividend to share in the retained earnings that have been stockpiled by the company.  This Bill would give the minority owner the right to recover damages from the majority owner and/or company whose board engaged in oppressive conduct that was harmful to the minority shareholder.

Based on the current posture of Bill 3168 at this time, it does not seem likely to pass in this legislative session.  We will continue to monitor the Bill’s progress, however, to see if the legislature’s interest is revived in the future in the current form of the Bill or as it may be amended in the future.  

By:  Simmons
H.B. No. 3168

A BILL TO BE ENTITLED AN ACT

relating to remedies for oppression of minority shareholders by directors of closely held corporations.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1.  Subchapter E, Chapter 21, Business Organizations Code, is amended by adding Section 21.227 to read as follows:

Sec. 21.227. REMEDIES FOR SHAREHOLDER OPPRESSION IN CLOSELY HELD CORPORATIONS. (a) In this section, “closely held corporation” has the meaning assigned by Section 21.563. (b) If, in an action by a minority shareholder of a closely held corporation, it is established that the actions of the board of directors of the corporation are oppressive with respect to the shareholder, the court may order, in addition to any remedy authorized by this code, any legal or equitable remedy the court determines appropriate under the circumstances, including:

  1. the appointment of a fiscal agent to periodically report to the court;
  2. the retention of jurisdiction by the court;
  3. an accounting of allegedly misappropriated funds;
  4. an injunction against the oppressive conduct;
  5. payment of a dividend;
  6. a buyout of the minority shareholder’s shares;
  7. authorization for the minority shareholder to purchase additional stock; and
  8. payment of damages caused by the oppressive conduct.

SECTION 2.  The change in law made by this Act applies only to oppressive conduct that occurs on or after the effective date of this Act.

SECTION 3.  This Act takes effect September 1, 2015.


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