Your Rights and Remedies as a Minority Shareholder (Worry Not: You Have Plenty)
The Supreme Court of Texas has made it much more difficult for minority shareholders to sue majority shareholders for oppression. In the 2014 case of Ritchie v. Rupe, the Court declined to recognize the common law cause of action for shareholder oppression. This severely restricted the rights and remedies of minority shareholders who find themselves subject to squeeze outs, freeze outs, and other forms of oppression.
But that doesn't mean minority shareholders have no recourse.
Minority shareholders still face the same issues they always have.
These problematic issues include:
- Obstructed access to the books and records
- Withholding or refusal to declare dividends
- Termination of employment
- Misapplication or wrongful diversion of corporate funds
- Manipulation of stock values
- Fraudulent transfers
Prior to Ritchie v. Rupe, you could generally sue for shareholder oppression if you faced the issues listed above, but that is no longer the case, and it hasn't been for a couple of years now.
Minority shareholders in close corporations face particularly difficult circumstances, as James Dawson points out in his Yale Law Journal essay: "[M]inority shareholders in close corporations are particularly vulnerable to oppression, as they cannot freely exit an enterprise in the same manner as a member of a partnership or a shareholder of a public corporation." Davis goes on to write that Ritchie "gutted" the cause of action for shareholder oppression in Texas, arguing that the case was wrongly decided.
Nonetheless, Ritchie is the law of the land, unless the Texas legislature acts to change it. So, as a minority shareholder, what recourse do you have? It turns out that there is plenty, as we describe below.
The rehabilitative receiver is a powerful remedy.
There are a number of remedies available to minority shareholders who face shareholder oppression. Among these are an accounting and an injunction. The rehabilitative receiver, however, deserves special mention.
In some cases, the court can appoint a third party to manage the business, known as the rehabilitative receiver. This person can effectively put an end to shareholder oppression by preventing or stopping the majority shareholder from abusing his or her power.
Other effective remedies include:
- Bringing a claim for breach of fiduciary duty
- Bringing a claim for breach of contract
- Obtaining an injunction to preserve the status quo
- Enforcing your right to inspect the books and records
Call Hendershot Cowart, P.C.
If you are a minority shareholder and you face shareholder oppression or another type of shareholder dispute, you should learn more about your rights and remedies, which still exist, even after the Court's decision in Ritchie. For a confidential consultation, call our Houston business lawyers at (713) 909-7323.