Without oppression claims, minority shareholders should plan ahead
The Texas Supreme Court’s decision in June that the state has no common law claim for minority shareholder oppression settled an area of business law that had been uncertain for decades. In doing so, the court also created new uncertainty for owners of closely held businesses.
The court ruling has the most immediate effect on shareholders who are currently in litigation over oppression claims because the legal basis for their claims suddenly changed. Regardless of whether they are involved in oppression claims, minority shareholders of closely held businesses face new challenges.
As the court noted in Ritchie v. Rupe, closely held corporations are owned by a small number of shareholders with shares that are not publicly traded. If the corporation does not have a shareholder agreement or other governing documents, minority shareholders may lack control over how disputes are resolved. They may also have no right to exit the business and get their money back and may not be able to sell their shares. In these situations, shareholders sometimes turn to oppression claims – but no longer.
Without the availability of an oppression claim, minority shareholders should consider reviewing their company’s governing documents. If the company exists without shareholder documents, shareholders should consider having them created while the company is doing well. The shareholder agreement and other governing documents can outline rights and responsibilities and provide mechanisms for resolving disputes. If the company does have a shareholder agreement and other documents, it may be time to review them.
- For information, see our page on shareholder agreements in Texas.