Dallas Court Overturns Judgment in Favor of Oppressed Minority Shareholder—Are Majority Shareholders Still Accountable for Their Oppressive Conduct?

This entry was posted in Blog, Minority Investors and tagged ARGO Data Resources Corp. et al. v. Shagrithaya No. 05-10-00690-CV 2012 WL 3755748 (Tex. App.—Dallas Aug. 29 2012 no pet. h.), August 29 2012, breach of fiduciary duty, fraud, minority shareholder oppression, overturns judgment, recent Dallas Court of Appeals decision, shareholder oppression on September 10, 2012 by admin.
On August 29, 2012, the Dallas Court of Appeals reversed a trial court’s decision that ordered the issuance of an $85 million dividend based on a minority shareholder’s claim of oppression. See ARGO Data Resources Corp., et al. v. Shagrithaya, No. 05-10-00690-CV, 2012 WL 3755748 (Tex. App.—Dallas, Aug. 29, 2012, no pet. h.).  A copy of the court’s opinion is available here.  The one-time dividend in ARGO Data would be split between the majority (53%) and minority (47%) shareholders. The trial court’s judgment was based on the results of a six-week trial where the jury made extensive findings that the majority shareholder had committed fraud, violated his fiduciary duties and improperly withheld dividends. The Dallas Court of Appeals nevertheless held that the minority shareholder was not oppressed primarily because the value of the company increased while the majority shareholder engaged in various improper acts, including the implementation of a secret scheme to phase out the minority shareholder from the company. Id. at *13.
As lead trial counsel for the minority shareholder in ARGO Data, we have been asked whether the Dallas Court of Appeals’ decision signals that courts will now apply a more stringent standard to shareholder oppression claims. While we expect the ARGO Data decision to be subject to further appellate scrutiny, we do not view this case (even if it stands) as giving majority shareholders a legal “license to oppress” minority shareholders. We believe the following issues are important to consider in light of the ARGO Data opinion.
1. The Result in the Trial Court
During the six-week jury trial, the minority shareholder in ARGO Data alleged and proved that the majority shareholder implemented a secret scheme (over several years) to force the minority shareholder out of a highly-successful business. The jury in ARGO Data answered over 100 questions in the jury charge and found the following: (1) the majority shareholder committed predicate acts of oppression directed at the minority shareholder; (2) the majority shareholder suppressed the payment of dividends to the company’s stockholders; (3) the majority shareholder committed fraud by giving false information to the minority shareholder; and (4) the majority shareholder unilaterally cut the salary of the minority shareholder without board approval; and (5) the majority shareholder used corporate funds for personal use (i.e., travel expenses; family expenses; condominium purchase).
The facts of the ARGO Data case are unusual (and unlikely to be repeated) where the majority shareholder/defendant stockpiled more than $140 million in retained earnings as part of a fraudulent scheme to squeeze out the minority shareholder. Yet, in the vast majority of oppression cases, majority shareholders do not sit on retained earnings of this magnitude.
2. The Dallas Court of Appeals Upholds Shareholder Oppression Claims
The claim for shareholder oppression is now well-established in the Dallas Court of Appeals. Prior to March 2011, the Dallas Court of Appeals had never decided a case that presented a claim for minority shareholder oppression. Just 18 months later, however, three different panels in the Dallas Court of Appeals have recognized the existence of a “shareholder oppression” claim under established Texas case precedent and statutes. In the first two cases, the appellate panels upheld the trial court’s judgment of shareholder oppression.
The Dallas Court of Appeals first addressed the claim for shareholder oppression in Ritchie v. Rupe, 339 S.W.3d 275 (Tex. App.—Dallas 2011, pet. filed). The Rupe Court upheld the court-ordered buyout of the minority’s shares based on the two-pronged standard for oppressive conduct by looking to the minority shareholder’s “reasonable expectations” and the majority shareholder’s “wrongful conduct.” Id. at 289 (citing Davis v. Sheerin, 754 S.W.2d 375, 381-82 (Tex. App.—Houston [1st Dist.] 1988, writ denied).
The second shareholder oppression from the Dallas Court of Appeals was in Cardiac Perfusion Services, Inc. v. Hughes, No. 05-10-00286-CV, 2012 WL 3038504 (Tex. App.—Dallas July 26, 2012, no pet. h.).  Again, the Hughes court recognized the well-established claim for shareholder oppression and affirmed the trial court’s decision to order the redemption of the oppressed minority shareholder’s stock for “fair value.” Id. at *5.
As in Rupe and Hughes, the Dallas Court of Appeals once again in ARGO Data considered the claim for shareholder oppression, but the Court concluded that there was no oppression as a matter of law. Similarly, the ARGO Data court acknowledged the jury’s findings of fraud, but nevertheless held that because the company’s value “continued to grow” during the fraudulent scheme, the minority owner had not been harmed.
3. Future Oppression Claims Following ARGO Data
In light of ARGO Data, the Dallas Court of Appeals appears to endorse a new test for oppression that considers whether the majority shareholder extracted benefits from the company that were not divided with the minority shareholder in proportion to their ownership interests. Indeed, that is the typical “shareholder oppression” scenario where the majority owner exploits his power or control over the company to obtain company funds for his own benefit. Under such a scheme, the majority owner avoids issuing distributions or dividends that would typically be shared with the minority owner(s).
Under the reasoning of ARGO Data, future shareholder oppression cases will involve majority shareholders that exploit their control to extract cash from the business (disproportionately to their ownership interest), and deprive minority shareholders of their fair share of the company’s profit. In these situations, we expect that Texas trial and appellate courts will continue to provide relief to oppressed minority shareholders.