Texas Supreme Court Rules in Minority Shareholder Oppression Case
July 1, 2014 by Jaclyn Burket, MBA, ASA
Filed under Blogs, Finance
On June 20, 2014, the Texas Supreme Court issued a ruling in the Ritchie v. Rupe case. In this case, the minority shareholder claimed shareholder oppression and breach of fiduciary duty. The trial court determined there was shareholder oppression and breach of fiduciary duty and ordered the corporation to buy-out Rupe’s shares for $7.3 million. The appellate court upheld the trial court’s decision regarding the finding of shareholder oppression, did not address the breach of fiduciary duty and sent the case back to the trial court to find a value of shares’ fair value including discounts for minority control and marketability.
The fact that the Supreme Court rejected the Fair Value of the shares and ordered the trial court to calculate the Fair Market Value of the shares presents a problem to minority shareholders. If the standard of value for shareholder oppression cases is now Fair Market Value, the value of a minority shareholder’s shares could be substantially impacted by discounts for Lack of Marketability and Lack of Control. The Texas Supreme Court did not agree with the trial court or the appellate court in its ruling. The Supreme Court ruled that minority shareholder oppression is not a common-law cause of action in Texas. Because the appellate court did not address the breach of fiduciary duty, the Supreme Court also did not address the breach. The case was remanded to the appellate court to address the breach of fiduciary duty.
What can minority shareholders do to protect themselves? Before investing in a company, make sure that you have a shareholders’ agreement in place and that you understand what is contained in that agreement. What are you agreeing to and what protections do you have? Read all of the corporate documents of the company and understand what is contained in them and how it impacts you (i.e., Bylaws, Operating Agreements, etc.). To read the full ruling and opinion, please see Texas Supreme Court Case: No. 11-0447, Ritchie v. Rupe 2014 Tex. LEXIS 500
I agree! Reading the shareholders’ agreement and fully understanding its legalese is imperative. If you don’t understand it, don’t sign it.
Great article and case update. Thanks for sharing.