Minority Shareholder Oppression: Apparent changes in the Texas rules.

For several decades, the leading case in Texas in the area of oppression of minority shareholders in a corporation was Davis v. Sheerin, 754 S.W. 2d. 375 (Tex. App.-- Houston [1st Div.] 1988), which to some has become a seminal case in the area. In June of 2014, the Texas Supreme Court considered the general issue in the procedural context of a request for the appointment of a receiver of a corporation in a contest between a minority and the majority shareholders of the corporation. In that decision, Ritchie v. Rupe, ____ S.W. 3d. ____- (Tex. 2014), the court held that (a) there is not a common law cause of action for shareholder oppression; rather the causes of action for (1) an accounting, (2) breach of fiduciary duty, (3) breach of contract, (4) fraud and constructive fraud, (5) conversion, (6) fraudulent transfer, (7) conspiracy, (8) unjust enrichment, and (9) quantum meruit, are the places to which a plaintiff needs to look under common and other statutory law for redress for perceived wrongs by majority shareholders; and shareholder agreements are said to be useful tools as well to address issues in this area. Secondly, the court held under the business entity receivership statute (which permits a receivership under state corporate law for, among other things, situations involving “oppression”), the court held that directors or managers engage in oppressive conduct “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so they create a serious risk of harm to the corporation. And in the process, the court specifically referred to the applicability of the business judgment rule in the context of complaints of oppression by minority stockholders. Commentators in Texas and beyond treat the decision as a major change in the law on shareholder oppression in Texas and, since the analysis and rule of Davis v. Sheerin are apparently widely accepted, it is quite possible that this re-examination of the area will cause additional re-thinking in other jurisdictions. At the least, it seems fair to say that cases of shareholder oppression will become considerably more difficult to win in Texas.