Minority Shareholders

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.

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.


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Monday, March 23, 2015

Phantom Stock is No Myth and Balances the Interests Of Majority Owners and Key Employees in Private Companies

Business owners often desire to incentivize key employees by providing them with an equity stake in the business.  These majority owners believe that issuing equity ownership to key employees will instil in them pride of ownership in the firm, create a stronger focus on business goals, and enable the company to achieve higher levels of profitability.  This strategy for enhancing profits, however, is not without threats to the company’s future corporate governance and litigation risk.


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Monday, March 9, 2015

If I Had A Hammer –Internet Sites Providing Helpful (and Free) Information for Investors in Private Texas Companies

Private company investments can produce hefty financial returns, which is why they are so attractive.  A private company investment can also be quite risky, however, particularly if, as discussed in our recent post, the investor failed to obtain any type of  buy-sell agreement (“corporate pre-nup”) at the time the investment was made and has no contractual exit right.  Given the substantial level of risk involved in making a private company investment, it is fortunate that a wealth of good information is available for investors in private companies – for free – on the Internet.  This post reviews five different websites that provide especially helpful information on a variety of financial and business topics for private company owners and investors to consider before and after making their investment in the company.


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Tuesday, March 3, 2015

Texas Supreme Court Considers How Deep the Rabbit Hole Goes: Can the Shareholder of a Parent Company Bring a “Double Derivative” Action Related to a Corporate Subsidiary?

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).


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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

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.


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Tuesday, January 20, 2015

Case Update: The Fifth Circuit Affirms Shareholder Oppression Claim and Highlights Importance of Derivative Claims for Compensatory Damages

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.


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Monday, November 24, 2014

Remedies Available to Minority Shareholders in Derivative Lawsuits Filed After Ritchie v. Rupe

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.


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Friday, July 25, 2014

The Legal Landscape after the Texas Supreme Court’s Rupe (Majority) Decision: “It Was Only a Flesh Wound:” Minority Shareholders Disabled But Not Disarmed

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.    


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Tuesday, July 8, 2014

The Texas Supreme Court Speaks (Finally) on the Rights of Minority Shareholders in Private Companies: Let the Investor Beware

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.


Read more . . .


Tuesday, May 20, 2014

Majority Rules - But Not Always With Total Impunity

Private companies are governed as mini-democracies - the majority rules.  In Texas, however, majority owners in private businesses do not have total discretion to act as they wish.  In fact, when majority owners engage in conduct that unduly benefits themselves, they are likely to find themselves subject to claims in litigation where their conduct may not survive judicial scrutiny.  When they overreach, majority owners remain subject to claims for breach of fiduciary duties and to claims for minority shareholder oppression.  There are three key danger areas that often trip up majority owners.  One of these may not be sufficient to create liability, but majority owners who engage in more than one of these are likely to find themselves in legal hot water.


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Friday, April 11, 2014

The “Double Derivative” Conundrum: Who Has the Right to Bring a Derivative Claim Against the Officers of a Privately Held Texas Company

Sometimes what we take for granted is not so clear.  It had been axiomatic for years that only shareholders have the right to bring a derivative lawsuit in the name of the company.  Yet, the Houston Court of Appeals recently permitted a shareholder (of a parent company) to bring a derivative lawsuit on behalf of the parent’s wholly-owned subsidiary.  See Webre v. Sneed, 358 S.W.3d 322 (Tex. App.—Houston [1st Dist.] 2011, pet. granted) (No. 12-0045).  The appellate court’s decision approved what is known as a “double derivative” lawsuit in which a stockholder of a parent corporation seeks to recover for a claim that belongs to a subsidiary corporation. The Texas Supreme Court has recently granted review of this decision, which is of considerable interest because of the “double derivative” situation in which the shareholder in the parent company did not own any shares in the subsidiary.


Read more . . .


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