Texas Business Dispute Blog

After the Texas Supreme Court issued a precedent setting series of decisions last June regarding the rights of minority shareholders in private Texas companies, the Court is again set to take up a case involving the rights of private company investors.  The Court’s decision will further shape the legal contours of minority shareholder rights in Texas.  See Webre v. Sneed, 358 S.W.3d 322 (Tex.App.—Houston [1st Dist.], rev. granted March 21, 2014).

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.

“From a relational standpoint, people enter closely-held businesses in the same manner as they enter marriage: optimistically and ill-prepared.” ^[1]

Every great business begins with a superb product or service that provides the company with a marketplace advantage.  Yet, many potentially great companies flame out relatively early in their existence when conflicts arise among the founders regarding their vision for and direction of the company.  No contract term can immunize a company from future ownership disputes, but a buy-sell provision provides a vehicle for resolving the ownership conflict because it provides for an exit strategy that enables or requires one or more of the owners in conflict to leave the company.  That is why in our practice we refer to buy-sell provisions as “corporate pre-nups” that, when necessary, will facilitate a so-called “business divorce” among the owners of the business. 

Dividing marital assets in a family divorce is often difficult.  The division of assets in a divorce becomes even more challenging when at least one of the spouses owns stock options or restricted stock.  For the reasons discussed in this post, divorcing spouses who own stock options or restricted stock should seriously consider entering into a settlement that maximizes the parties’ financial objectives and avoids the risk associated with litigation in divorce court.

The Fifth Circuit Court of Appeals recently issued an opinion in In re Mandel, 578 Fed. App’x 376 (5th Cir. 2014)arising out of a long-running dispute among former business partners of a company they formed in efforts to develop an internet search engine they hoped would rival Google.  The decision in Mandel follows a lengthy trial in the bankruptcy court and subsequent appeals to the federal district court and the Fifth Circuit.  From a legal perspective, Mandel is interesting because it was the first decision to consider – and then affirm – a shareholder oppression claim after the Texas Supreme Court’s ruling in Ritchie v. Rupe.   From a factual perspective, Mandelreflects the aftermath of the conflict that began as an optimistic joint venture between a patent attorney and an eager Entrepreneur, but which led to years of litigation over their company, White Nile. 

The full opinion from the Fifth Circuit in Mandel is available here.

Minority shareholders in private Texas companies often find themselves in a precarious position if they failed to obtain a contractual right to exit the business -- a "corporate pre-nup" -- at the time of their investment.  When minority owners do not secure a buy-sell term or some other type of redemption provision on the way in, they are likely to be locked into their investment with few options to market their stock.  The recent Texas Supreme Court decision in Ritchie v. Rupe—recently described as “astonishing,” “bad law” and “bad policy” by the Yale Law Journal—only made things worse for minority investors because the decision permits majority owners to refuse to meet with potential buyers of the minority owner’s stock.  See James Dawson, Ritchie v. Rupe and the Future of Shareholder Oppression, 124 Yale L. J. 89 (2014).  Our previous Blog posts here and here analyze the Ritchie case in more detail.

The New Battleground for Private Company Minority Investors - Post-Rupe Claims

The Texas Supreme Court’s recent opinion in Ritchie v. Rupe was a clear setback for the rights of minority shareholders in close corporations in Texas.  But unlike the Black Knight, who refused to acknowledge that he had legitimately been vanquished, minority shareholders after Rupe continue to have viable claims to assert against majority owners when they overstep their bounds in exploiting their control of the company.    

The times are changing for minority shareholders of private companies in Texas, but not necessarily for the better. The Texas Supreme Court recently issued three long-awaited rulings in cases presenting claims by minority shareholders in private businesses, and these decisions were not favorable to minority owners. Our next two Blog Posts therefore assess the significant impact of the Court’s recent decisions on the legal rights of owners and investors in Texas private companies. In this first post, we focus on how the Court’s rulings have altered the existing legal landscape. In our second post, we forecast where we expect the battle lines to be drawn in future conflicts between majority and minority owners, and review the legal avenues that are still available to minority investors who contend they are being harmed by the improper actions of majority owners or those in control of the company.

Donald Sterling’s racist rant has made him one of the most reviled figures in (or related to) sports in recent years, and resulted in a $2.5 million fine and a lifetime ban imposed on him by the NBA.  In light of the wall-to-wall coverage this story received, few people are unaware that Shelly Sterling, Mr. Sterling’s estranged wife, plans to divorce him.[1]  She delayed filing for divorce, however, to avoid disrupting her attempted sale of the Clippers.[2] 

A recent decision by the Delaware Supreme Court upholding the validity of “loser pays” provisions is making waves in corporate shareholder circles, and not just in Delaware.   See ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., Supreme Court of Delaware, C.A. No. 07-178, May 8, 2014.  The Court’s decision is notable, and it hearkens back to Justice Potter’s quote on the subject of pornography 50 years ago, i.e., I know it when I see it.[1]   In ATP Tour, the Court approved a corporate board’s authority to adopt a loser pays bylaw, but the Court also noted this type of bylaw could be invalidated if circumstances suggested that it was adopted for inequitable or improper purposes.  The Court did not offer specific guidance, however, as to what specific circumstances would make the bylaw either acceptable or improper. 

Does the spouse of a professional sports team have the right to claim rights as a partial owner of the franchise based on the fact that the ownership of the team is part of the marital community estate?  This is by no means an academic question as the recent comments made by Sherry Sterling, the estranged wife of LA Clippers owner Donald Sterling, have presented the issue for public consideration.