On June 20, 2014 the Texas Supreme Court handed down its long-awaited decision in a case called Ritchie v. Rupe, striking a severe blow to the rights of thousands of Texas citizens who are minority owners of investments in small business corporations. For the 25 years or more preceding this surprising ruling, minority shareholders who suffered oppression at the hands of their majority co-owner shareholders, enjoyed the ability to pursue and recover a broad array of legal and equitable remedies upon establishing the occurrence of wrongful oppression. That relief included, but was not limited to, damages, a judgment requiring the majority owners to purchase the minority owner’s stock at fair enterprise value, and in the most severe cases, appointment of a receiver.
Notably, shareholder oppression in Texas uniformly and consistently has been defined by the numerous intermediate courts of appeals throughout the state as “majority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholders’ decision to join the venture; or burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members’ or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely”. These actions involve an unjust exercise or abuse of power that harms the rights or interests of persons subject to the actors authority and disserves the purpose for which the power is authorized.
In Ritchie v. Rupe, the Supreme Court clarified what oppression is, indicating that it remains wrongful. However, the Court rejected the notion that damages or other equitable relief can be recovered in the event of oppression under the Texas anti-oppression statute that has been relied upon throughout the past 25 years by the intermediate appellate courts, and hundreds of trial courts, in uniformly awarding such relief. And, although it could have done so, the Court declined to extend Texas common law to authorize such relief.
The Court’s decision places minority shareholders in Texas in the position of being at the mercy of ne'er-do-well business partners who act against them to deprive them of all benefits of ownership, while maximizing the same for themselves at the expense of the oppressed shareholders. Tellingly, the Court acknowledged that its interpretation of Texas’ anti-oppression statute, and its failure to impose a common law remedy, “leaves a ‘gap’ in the protection that the law affords to individual minority shareholders” – a gap that had not existed because Texas courts had interpreted the statute to allow for those remedies. Leaving Texas citizens having to wonder whether the Legislature will step in to close this “gap,” the Court acknowledged that its restrictive interpretation of the statute leaves minority shareholders very exposed.
According to dissenting Justice Eva Guzman and her two co-dissenting colleagues, "Texas becomes the first [of 37] jurisdictions with a statute [prohibiting oppression] that unequivocally prefers lesser remedies to effectively preclude those remedies – despite overwhelming authority observing that, to the contrary, many if not all jurisdictions allow these lesser remedies". The June 20, 2014 decision overrules 25 plus years of well-reasoned, uniformly applied Texas case law recognizing and protecting the rights of minority shareholders, and (according to Justice Guzman) “extinguishes the very remedies [the statute] expressly prefers.”
Stripped by the Supreme Court of the remedies and protections provided to them for more than 25 years, would-be future investors in Texas small business corporations would be wise to think carefully about whether or how they might protect themselves against oppressive acts of their potential co-owners before investing, as the law in Texas will no longer do so in the manner they would have expected until June 20, 2014. Existing shareholders, never knowing when they might become minority owners subject to the oppressive acts of a majority, would also be well-advised to explore the implementation of protections, by agreement.
As for the probable chilling effect this unfortunate decision change in the law will have upon small business investing in Texas, all of us who are concerned with keeping the Texas economy vibrant and healthy, will have to wait and see just how negatively this decision will affect business growth in Texas.