Dallas Court of Appeals Decision

Since 2014, Energy Transfer Partners LP (“ETP”) has been fighting to hold on to the $535 million judgment it obtained that year against Enterprise Products Partners (“Enterprise”).  Our blog post earlier this year analyzed ETP’s efforts to persuade the Dallas Court of Appeals that ETP and Enterprise, two sophisticated companies in the energy industry, had entered into an unwritten partnership agreement, or as Enterprise referred to it on appeal – a partnership by ambush in disregard of the parties’ written agreements.

It is no longer news to report that Texas has become a hostile forum for corporate (and other) plaintiffs who recover large jury awards.  For more than a decade, the press has featured numerous stories on Texas appellate courts (including the Supreme Court) overturning large jury verdicts after jury trials.  One of the most recent, notable examples is a decision by the appellate court in San Antonio, which disregarded detailed jury findings in reversing a verdict awarding substantial damages to a corporate plaintiff harmed by two of its disloyal, outside directors.  See Huff Energy Fund, LP, et. Al. v. Longview Energy Company, No. 04-12-003630-CV (Tex. App. – San Antonio, November 25, 2015).

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.

Until recently, Texas courts routinely gave the trump card to majority owners of private companies in conflicts with minority investors when they had entered into a buy-sell agreement.  Specifically, if the minority investor entered into a buy-sell agreement, the investor was bound to the buy-out formula in the agreement despite any later actions by the majority that were allegedly to be improper. This settled rule has been modified, however, by recent Texas appellate cases.  Indeed, unless the Supreme Court intervenes, minority investors have the right to challenge the enforcement of a buy-sell agreement when the majority owners engage in conduct that deprives the minority investor of the benefit of its bargain.

In July 2012, the Dallas Court of Appeals declined to enforce a buy-sell agree-ment at the majority shareholder’s request based on jury findings that the majority owner had oppressed the minority shareholder. The appellate court upheld the jury verdict and awarded the minority investor a buyout at “fair value” rather than “book value” provided by the buy-sell agreement. See Cardiac Perfusion Servs., Inc. v. Hughes, 380 S.W.3d 198 (Tex. App.—Dallas 2012, pet. filed)(Supreme Court requested briefs on the merits in June 2013, but has not yet formally granted or denied petition for review)

Legal commentators have recently described shareholder oppression claims as a “hot topic” in Texas.  That is not a surprise in light of three separate opinions from the Dallas Court of Appeals (since March 2011) focusing on shareholder oppression claims.  And each of these three decisions has attracted the attention of the Texas Supreme Court which recently heard oral argument in Ritchie v. Rupe, 339 S.W.3d 275 (Tex. App.—Dallas 2011, pet. granted) (No. 11-0447) in February 2013—while also recently requesting (and receiving) briefs on the merits in the two other shareholder oppression cases in Argo Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012, pet. filed) (No. 12-1012) and also in Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d 198 (Tex. App.—Dallas 2012, pet. filed) (No. 13-0014). 

Seven months ago, the Supreme Court heard oral argument in Ritchie v. Rupe.  This was the Texas Supreme Court’s first look at the claim for minority shareholder oppression in more than 50 years since the Court first recognized the cause of action in Patton v. Nicholas, 279 S.W.2d 848 (Tex. 1955).  With briefing and oral argument completed in Ritchie, the time has come to start reading tea leaves as the Supreme Court will soon issue just its second decision since the statute was enacted by the Texas Legislature in 1955.

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.