Houston Minority Shareholder Oppression Attorneys
Defending the Rights of Texas Minority Shareholders
Closely held corporations have ownership structures that often leave minority shareholders in vulnerable positions. Minority shareholder oppression occurs when majority shareholders leverage their power to take action that unfairly prejudices the minority shareholders.
As recognized industry leaders in business law with over 100 years of combined experience, the attorneys at Hendershot Cowart P.C. provide the comprehensive counsel shareholders need to protect their rights. Given the difficult nature of these cases, particularly in light of a landmark Texas Supreme Court decision that overturned minority shareholder oppression as a common law cause of action (or the right to sue for damages or enforcement) for shareholder oppression lawsuits, minority shareholders require creative legal solutions and experienced representation capable of producing the positive outcomes they need.
On This Page
- Forms of Minority Shareholder Oppression
- Legal Options to Defend Minority Shareholders Against Oppression
- Shareholder Dilution and Preemptive Rights
- Legal Remedies for Shareholder Dilution
- Shareholder Agreements Can Protect Your Shareholder Rights
- What are the Benefits of a Shareholder Agreement?
- How Our Attorneys Can Help
A closely held company is typically controlled by a small number of shareholders or owners, in which possess the majority of the shares. By virtue, the balance of decision-making authority rests in the hands of the majority owners, or a few acting as a coalition. This leaves those with a non-controlling interest subject to the discretion of the controlling majority.
Since stock in a closely-held corporation is not readily salable, a minority shareholder at odds with management may be vulnerable to shareholder oppression by form of “squeeze-outs” or “freeze-outs”.
- Squeeze-outs: Minority shareholders are forced to sell their interest in the company at an unfairly low price or receive nothing at all for their interest.
- Freeze-outs: Majority shareholders render the minority shareholder’s share or ownership meaningless, preventing the shareholder from liquidating his or her investment.
Ultimately, squeeze-outs and freeze-outs are tactics used by majority owners to diminish the value of a minority shareholder’s interest in the business. This can include:
- Terminating key business relationships
- Ignoring key contracts minority shareholders control
- Refusing to pay dividends or bonuses
- Reducing the value of the stock on paper
- Theft of trade secrets
- Terminate the minority shareholder’s employment
- Refuse a minority’s access to information about the corporation and from any participation in management
- Divert the minority’s resources (salaries and benefits) to those still under the employ of the business
- Vote the minority off the governing board
- Awarding excessive bonuses to themselves or other business partners
In the absence of a common law cause of action for minority shareholder oppression brought about by Ritchie v. Rupe, many felt a significant blow had been dealt to the legal rights of minority shareholders. However, minority shareholders may still have options and adequate remedies to hold majority shareholders accountable for oppressive conduct.
The same conduct that can contribute to oppression claims may also provide the basis for other causes of action and legal actions, including:
- Demaning an accounting
- Bringing a claim for breach of fiduciary duty
- Bringing a claim for breach of contract
- Bringing a claim for fraud or fraudulent transfers
- Unjust enrichment
- Quantum merit
- Theft of trade secrets
- Obtaining an injunction to preserve the status quo
- Enforcing your right to inspect the books and records
- Violation of shareholder agreements, operating agreements or bylaws
Even if you or your business is not experiencing minority shareholder oppression, our Houston business law firm can advise you on rights and protections in shareholder agreements and other governing documents that can help mitigate future potential areas of conflict.
Shareholder oppression can take many forms, and for some minority shareholders that includes dilution of their ownership interest and voting power. If a 10% shareholder owns 100 shares of 1,000 issued shares, for example, the issuance of 1,000 new shares would render them a 5% owner.
To protect against dilution and safeguard ownership interest, dividend rights, and voting power, shareholders may opt for preemptive rights – a type of right of first refusal to purchase additional shares in any future issued stock.
While preemptive rights allow shareholders to purchase additional shares in any new interest to maintain their ownership percentage, they’re not the norm in Texas. Under Texas law:
- Corporations formed after 9/1/2003 do not have preemptive rights, unless they’re explicitly granted in the Certificate of Formation.
- Corporations formed prior to 9/1/2003 have preemptive rights, unless the Certificate provides otherwise.
Given the opt-out / opt-in nature of preemptive rights, they’re relatively rare in Texas. However, they can be negotiable for shareholders looking to protect themselves, often in circumstances where they’re used as incentive for early or majority investors who take on great risk when funding a new venture, or struggling business.
Even when shareholders have preemptive rights, they may not always be of benefit if a shareholder lacks financial means to purchase them, or if corporations or majority shareholders issue stock under one of the exceptions outlined in Texas Business Organizations Code sections 21.203-21.208. Majority owners intent on diluting shares can still effectively do so.
Because preemptive rights are not a fail-safe solution to preventing dilution, and because Texas’ Ritchie v. Rupe ruling eliminated the shareholder oppression cause of action in Texas, shareholders whose rights are violated in squeeze-outs that utilize dilution will need to explore their options for legal remedy.
Although every case is different, this may include:
- Ultra vires actions, if new shares were issued in violation of preemptive rights or other restriction outlined in the Certificate of Formation, such as the number of shares issued exceeding authorized shares, or shares being issued for no consideration.
- Breach of fiduciary duty, if a large number of shares were issues for substantially inadequate consideration.
- Derivative shareholder lawsuits brought on behalf of the corporation over breach of fiduciary duty and / or loss of value of a corporation’s shares, or direct shareholder actions.
- Individual shareholder claims over breach of trust / informal fiduciary duty, or conversion
- Breach of contract / violation of shareholder agreement
Because things don’t always go as planned, establishing a shareholder agreement is vital to protecting yourself as a shareholder in the event that relationships change and disputes arise. However, many shareholders forgo this type of "prenuptial" agreement, especially when small privately held companies are often forged through relationships between friends or family who are reluctant to believe either party would ever engage in oppressive conduct. Without such agreements, minority shareholders find themselves exposed to minority shareholder oppression, limited to few options for extracting themselves from a business relationship without financial loss.
By working with an attorney early in the process and crafting a reasonable shareholder agreement, minority shareholders can protect their interests and benefit from options should the need arise.
Benefits of a shareholder agreement include:
- Addressing the roles, obligations and commitments of majority and minority shareholders in on-going operations and corporate decision-making
- It can be used to protect the position of minority shareholders, establishing preventative measures to prevent shareholder oppression
- Regulating the procedures to designate, replace, or remove directors and officers
- Creating options for removal of inactive or otherwise undesirable or potentially harmful shareholders
- It can place limits or restrictions on changes to the nature of the company business
- Establishing stipulations for dealing with buyout offers and events likely to impact corporate ownership and control
- It can provide resolution options such mediation or arbitration in the event of a shareholder dispute or deadlock
- Addressing competition if a shareholder leaves or is removed and/or include covenants not to compete or no-competition clauses
- Establishing a method to determine the value of a share in-advance
- Protecting intellectual property and trade secrets
If you are a minority shareholder and would like to learn more about preventing shareholder dilution or taking legal action to enforce your shareholder rights, Hendershot Cowart P.C. is available to discuss your legal options. Our award-winning legal team offers proactive counsel for contract review and negotiation, start-ups and corporate governance, and dispute resolution via mediation, arbitration or litigation.
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