Over the past year, the suspense has been steadily building in Texas in the Business Divorce arena. Trial and appellate courts throughout the state are grappling with the claim for minority shareholder oppression and the Supreme Court is on now the verge of issuing its first significant opinion considering the shareholder oppression claim in more than fifty years. The following are some brief take-aways from Business Divorce cases decided in Texas last year or in late 2012, which involve issues that will continue to be considered and developed in future cases:
Key 2013 Cases in Review
- The Supreme Court Is Poised to Weigh In: In February 2013, the Supreme Court heard oral argument in the Ritchie v. Rupe. A decision is now imminent in a case in which the Court is likely to consider the elements and contours of the shareholder oppression claim under Texas law. Some commentators have given short shrift to Rupe, referring to it as a “failure to meet” case in which the Court has only to decide whether the refusal of the majority owners to meet with a potential third party buyer of the minority shareholder’s interest constitutes oppression. That narrow reading, however, unduly limits the facts presented to the jury and, indeed, Jeff Levinger (appellate counsel for the minority shareholder) presented the Texas Supreme Court with a much more nuanced view and explained why his client contends the majority shareholders acted improperly in rejecting all contact with potential buyers of the minority interest, which was deemed oppressive by the trial court, a finding upheld on appeal. The Rupe appeal has been pending at the Texas Supreme Court since June 2011 (almost 1,000 days), and the decision will be a significant one that shapes the legal landscape in this area. See Ritchie v. Rupe, 339 S.W.3d 275 (Tex. App.—Dallas 2011, pet. granted) (No. 11-0447).
- Written Agreements Are Not the Last Word in Shareholder Disputes: During 2012 and 2013, two Texas appellate courts concluded that the valuation method (i.e.the discounted “book value”) in a written buy-sell agreement was not enforceable because the majority owner had engaged in oppressive conduct. Instead, the Texas courts valued the minority interest at “fair value” (without a minority discount for lack of control) because the minority shareholder alleged oppression—not breach of contract. These cases are significant as they precluded the majority shareholder from engaging in oppressive conduct and then relying on the valuation method set forth in the buy-sell contract to avoid the legal consequence of his actions. See Kohannim v. Katoli, No. 08-11-00155, 2013 WL 3943078, at **12-13 (Tex. App.—El Paso July 24, 2013, pet. denied) (citing Cardiac Perfusion Servs., Inc. v. Hughes, 380 S.W.3d 198, 203 (Tex. App.—Dallas 2012, pet. filed) (No. 13-0014) (affirming court-ordered redemption of minority shareholder’s interest for fair value, rather than book value, based on a finding of shareholder oppression).
- New Fiduciary Duties Apply to Limited Partners: As a general rule, limited partners do not owe fiduciary duties to their co-limited partners. The courts have made an exception to this general rule, however, and will impose fiduciary duties on limited partners in their treatment of their co-limited partners when limited partners act in a manner to control or direct the operations of the partnership. See Strebel v. Wimberly, 371 S.W.3d 267 (Tex. App.—Houston [1st Dist.] 2012, pet. filed) (No. 12-0489)In Strebel, the court closely reviewed cases on this issue and commented that, “a party’s status as a limited partner does not insulate that party from the imposition of fiduciary duties that arise when a limited partner also takes on a nonpassive role by exercising control over the partnership in a way that justifies the recognition of such duties or by contract.”
- Liquidation of the Company is a Remedy for Oppressive Conduct: Although they rarely exercise it, trial courts do have equitable power to order the liquidation of a company when majority owners are found to have engaged in oppressive conduct. See Boehringer v. Konkel, 404 S.W.3d 18 (Tex. App.—Houston [1st Dist.] 2013, no pet.).