Frequently when I counsel a minority shareholder about their rights I tell them what they already know – “they are along for the ride”. What does that mean? That as long as the other (controlling) shareholders don’t violate the law or their shareholder agreements, there is little a minority shareholder can do about it. Over the years various theories developed in Texas and other jursidictions that a minority shareholder could try to employ to challenge other shareholders’ conduct. This included the “freeze-out” and “oppression” theories and the claim for an “equitable buyout.”
The buyout claim basically went like this – the conduct of other sharholders was so oppresive that the court should order those shareholders to buyout the minority shareholder. This is serious relief. Basically the court is asked to ignore the tenants of the shareholders’ agreement and step in to correct a wrong. The claim sprung from a case in Houston, was never found in a statute, and was rarely used. Within the last few months the Texas Supreme Court rejected the claim entirely. First, the Court regined in the elements necessary to prove oppression holding that such a claim exists only when:
- the majority shareholders abuse their authority over the corporation with the intent to harm the interests of one or more the shareholders;
- in a manner that does not comport with the honest exercise of their busiess judgment; and
- by doing so creates a serious risk of harm to the corporation.
The Court then went on to hold that a buy out claim does not exist under Texas law. Though such a claim was infrequently successful, the there was at least the threat of such a remedy. With that gone, and an opinion that trends against minoirty shareholder rights, the minority owner has to recognize that they are truly “along for the ride”. This is a reality that has to be understood from the outset of the relationship and should also make shareholders think seriously about what law will control the business? If you are a majority shareholder Texas is a pretty good place to be, but the same cannot be said for the minority owner. We’ll talk about the remaining claims minority shareholders have in the weeks to come.