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.
As a summary, the minority shareholder in Ritchie v. Rupe inherited approximately 18% of a private company’s stock, yet wanted to sell the stock to a third-party buyer. But the majority owners refused. Without a market to sell her stock, the minority shareholder brought claims that werepremised on the fact that the majority owners of the company refused to meet with a potential third-party buyer of the minority’s interest in the business. The effect of the majority owners’ decision left the minority owner with no ability to monetize (sell) her interest to any third parties, which both the jury and the trial court concluded was oppressive. The trial court then signed a judgment ordering the company to purchase the minority shareholder’s stock at “fair value” of $7.3 million as found by the jury.
The Dallas Court of Appeals in Ritchie v. Rupe upheld both the trial court’s finding of minority shareholder oppression and the remedy of a court-ordered buyout of the minority’s ownership interest. At the same time, the Dallas Court of Appeals ordered a new trial on the amount of the $7.3 million buyout awarded to the minority shareholder because the jury was improperly instructed as to which discounts apply to the value of the minority owner’s interest based on the “lack of control” and “marketability” that are often factored into the value of a minority-held interest upon sale to a third party.
WHAT IS AT STAKE IN THE TEXAS SUPREME COURT
Since its decision in Patton v. Nicholas, the Texas Supreme Court has not issued a ruling in a minority shareholder oppression case in over 50 years which is why so much attention has focused on the upcoming decision in Ritchie v. Rupe. It is not entirely clear how broad the Supreme Court’s decision will be, however, some of the key issues that may be addressed in Ritchie v. Rupe include the following: (1) explaining the elements of a claim for shareholder oppression in light of the Texas statutory language, (2) weighing whether a company’s majority owners owe a duty to the minority owners to meet with prospective, third party buyers of the minority’s interest, (3) defining what remedies can the trial court impose after determining that oppression took place, and (4) from a procedural procedure, delineating who should decide — the judge or the jury — whether the majority owner(s) has oppressed the minority owner.
WHAT DO THE TEA LEAVES SAY
In our effort to decide how the Supreme Court will resolve Ritchie v. Rupe, the first step is to consider some statistics. First, when the Court “grants” a petition for review, it generally reverses the appellate court’s opinion in a majority of cases. Thus, some commentators have expressed the view the Court’s decision to grant oral argument in Ritchie means that the Court might reject (or perhaps limit) the existence of a shareholder oppression claim under Texas law. Looking under the first tea leaf, we do not expect the Court to pull the plug on claims for minority shareholder oppression. Indeed, the focus of Ritchie v. Rupe at trial (and on appeal) was not necessarily about whether the claim for oppression was valid, but whether the facts proved the minority shareholder had been oppressed. In addition, several of the Texas Supreme Court Justices acknowledged at the oral argument in February 2013 that a Texas statute provides the basis for an oppression claim when there is a showing of “illegal, oppressive or fraudulent” conduct by the majority shareholders. See Tex. Bus. Org. Code § 11.404(a)(1)(C). Indeed, the significance of the statute cannot be ignored. As a result, we do not expect the Court to overlook the existing statute and jettison more than two decades of Texas case law (from almost every Texas appellate court) that universally upholds and endorses claims for shareholder oppression.
What will the Court address in its opinion? Under the second tea leaf, the Court may consider the appropriate legal contours of a claim of shareholder oppression. The appeal in Ritchie v. Rupehas also generated considerable discussion in six different amicus curiae briefs about where to draw the line for these claims, including a group of professors at various Texas law schools, a law professor at Baylor Law School, members of the Business Law Section of the Texas Bar, experienced corporate and securities lawyers, and the Texas Trial Lawyers Association. One of the key questions is whether the Court continues the “two-prong” standard for determining oppression as under the equitable prong: “burdensome, harsh, or wrongful” and/or under the second prong under the “reasonable expectations” test. The jury in Ritchie v. Rupe found the conduct was oppressive under both tests. While both standards could survive, the Court did express some skepticism as to the statutory basis for the “reasonable expectations” test. Under the “reasonable expectations test,” a minority shareholder can establish oppression when his/her reasonable economic expectations formed at the time of the investment were frustrated by the actions of the majority owners. The outcome here is more difficult to predict, but the Court is being urged to limit the legal standard for oppression to instances where there is “illegal, oppressive, or fraudulent” conduct by the “governing persons” consistent with the statutory language. See Tex. Bus. Org. Code. § 11.404(a)(1)(C).
Under the final tea leaf, there is also some likelihood that the Court will take up the issue of the appropriate remedy for oppression. The majority shareholder in Ritchie v. Rupe does acknowledge the Texas statute on point, yet arguesthat the statute limits the remedy to one thing – the imposition of liquidation or a receivership. Two of the Supreme Court Justices noted during oral argument, however, that appointment of a receiver should be the last resort under the statute, and that there are less drastic remedies that the court may impose. Given that a buyout is a less drastic remedy than either liquidation or the appointment of a receiver, we expect the Court to uphold the trial court’s right to impose a court-ordered buyout of the minority’s interest.
The tea leaves have brewed and the drink is ready to be served. We should know soon whether the brew is one that provides a sweet or bitter flavor to majority and minority business owners and will likely impact the outcome of closely related shareholder oppression cases (also from the Dallas Court of Appeals) that are pending before the Supreme Court in Argo Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012, pet. filed) and also in Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d 198 (Tex. App.—Dallas 2012, pet. filed).