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Majority Shareholder Rights - Defending Shareholder Oppression Claims

Defending majority shareholder rights against oppression claims - the business judgment rule and the limits of shareholders rights.

Don't Majority Shareholders Have Rights, Too?

Majority Shareholder Right - Defending Oppression Claims

Even before Ritchie v. Rupe, plaintiffs did not always win minority shareholder oppression claims. There were plenty of valid defenses under the Shareholder Oppression Doctrine. As the law innovates to fill the gaps left by the Ritchie opinion, both causes of action and affirmative defenses will be adapted to address claims of oppressive conduct in closely-held corporations and to balance majority shareholder rights against those of the minority.

 

Dealing with Charges of Oppressive Conduct

Defending a claim of shareholder oppression could be challenging because there was no clear standard.  Ultimately, the defendant had to force the plaintiff, through special exceptions, discovery, and no-evidence motions for summary judgment, to break the pattern of oppression into discrete acts or omissions.  Then each individual item could be attacked.  The item may not have happened, may be fair and in good faith, may fall within the business judgment rule, may be a valid exercise of majority shareholder rights etc.  The ultimate goal is to knock out or minimize enough of the items that the court must conclude that the plaintiff has not proven a pattern of oppression or that the misconduct remaining is limited enough that a lesser remedy than forced buyout is most appropriate. The former Shareholder Oppression Doctrine required much more than a deminimus frustration of the shareholder's rights and interest; the expectations of a shareholder must be (1) objectively reasonable, (2) central to the decision to join the venture, and (3) substantially defeated. In Willis v. Bydalek, the court held that a minority shareholder's expectation of continued employment could not be objectively reasonable under those circumstances for an at-will employee, and that loss of employment standing alone was insufficient to constitute oppression.

Denying Shareholder Status Is a Risky Shareholder Oppression Defense

Obviously, if the plaintiff is not a shareholder, then the plaintiff does not have any shareholder rights and cannot be oppressed.  Several shareholder oppression cases have turned upon whether or not the plaintiff was a shareholder. In Willis v. Donnelly, a Texas Supreme Court reversed a shareholder of aggression judgment on the grounds that the plaintiff had not yet become a shareholder pursuant to his agreement with the corporation. A defendant might also challenge the minority shareholder's shareholder status on the basis that the plaintiff had not given consideration for his shares. This situation might arise when friends set up a new corporation and one of them may have been given shares but not asked to contribute any money or to do anything. Stock issued without consideration is not validly issued and is void under Texas law. A corporation cannot, through its conduct, ratify the issuance of stock where no consideration was given for the shares. However, the Business Organizations Code provides that a wide variety of consideration is valid for the issuance of shares--not only money, but services, promises, debt, almost anything of value--and, in the absence of fraud, the judgment of the board of directors as to the value and sufficiency of consideration received for shares "shall be conclusive." However, those provision do not bar a defendant from introducing evidence to dispute that the plaintiff furnished any consideration for his stock. 

Nevertheless, there is a very significant downside risk in disputing the plaintiff's share ownership. In Davis v. Sheerin, the majority shareholder contended that a minority shareholder had abandoned or relinquished his share of ownership some years before as a gift to the majority shareholder. In that case, the jury rejected the majority shareholder's contention, and the majority shareholder's attempt to deny the minority shareholder's shareholder status became one of the key bases for affirming a shareholder oppression judgment against the majority shareholder.

Business Judgment Rule

Actions against officers or directors of a corporation for breach of their duty of due care almost inevitably trigger the response that management is not liable for ordinary mistakes of business judgment. The so-called "business judgment rule" shields a corporate director who acts in good faith and without corrupt motive from any liability for mistakes of business judgment that damage corporate interests.  In Texas, it is often stated that the business judgment rule protects non-interested directors from liability unless the challenged action is ultra vires or tainted by fraud or self-dealing. It is important to note that the business judgment rule is not a majority shareholder right--indeed, it may not apply to majority shareholders at all, as such--the business judgment rule is a judicial policy not to scrutinize business decisions made honestly (no conflict of interest) that are within the authority of the corporate management. It is a near absolute defense to claim by or on behalf of the corporation against officers and directors for breach of the duty of care.

In the oppression context, business decisions protected by the business judgment rule or mere "dissatisfaction with corporate management" will not establish oppression.  In Allchin v. Chemic, Inc., the court of appeals affirmed a directed verdict on the oppression claim, and held that the allegations of the plaintiff, which were principally complaints about his treatment as an employee and about the competence and performance of the other shareholder in his job responsibilities, did not support a finding of a pattern of oppressive conduct. The plaintiff's pattern of oppressive conduct consisted of "not providing as much training as Allchin expected (although Wadiak provided training material and opportunities to work in the field); failing to use his talent and best effort to maximize Chemic's success (e.g., drinking and not working a sufficient number of hours); failing to participate materially and contribute to the operation of the business ("[l]ack of self-control/leadership in the corporation"); failing to allow Allchin to participate and contribute to the management of the company (e.g., hiring an employee Allchin did not want to hire); and, using Chemic for personal gain (no examples provided)" The court held: "Allchin's complaints reflect disagreements about policy, and, as such, do not support a claim of shareholder oppression warranting a buy-out." Willis v. Bydalek held that legal doctrines, like at-will employment and the business judgment rule, must be considered and weighed in determining whether the shareholder's expectations were objectively reasonable and that expectations grossly at odds with such doctrines would be unreasonable as a matter of law. However, the court of appeals decision in Ritchie v. Rupe, essentially held that a shareholder's fundamental rights, or "general reasonable expectations," trumped the business judgment rule.

Acquiescence as a Defense to Shareholder Oppression

Frequently, a minority shareholder will point to conduct or transactions as part of the pattern of oppression that the shareholder may have expressly or impliedly agreed to or practices and policies in which shareholder previously participated.  Generally, these instances may be excluded from the evidence of a pattern. Only a "nonconsenting" shareholder may challenge a breach of fiduciary duty.   In Pacific American Gasoline Co. of Texas v. Miller, the court of appeals rejected a claim by a group of shareholders that the corporation's issuance of certain securities was ultra vires and void because the securities were not supported by adequate consideration. The Court held that these shareholders "cannot now be heard" on these claims because they had participated in the shareholders' meeting approving the issuance and had previously acquiesced to the issuance: "Plainly the stockholder who acquiesced therein, and actively participated in the issuance of these [securities], cannot now be heard to say that the consideration received was not equal to the face value of the note." The United States Supreme Court, in Bangor Punta Operations, Inc. v. Bangor & Aroostook RR Co., noted the equitable principle that a "stockholder has no standing if either he or his vendor participated or acquiesced in the wrong."

In Hoggett v. Brown, the plaintiff acquiesced to defendant's acting as a director even though never formally elected and organizational documents never amended to increase size of board, by treating defendant as director and signing documents stating he was a director; therefore the plaintiff was barred from asserting as part of an oppression claim that the defendant had illegally assumed control. The court noted further: "Texas courts have applied equitable principles to notice requirements in situations where corporate control was at stake. ... [W]e see no reason why one director, under proper facts, cannot be barred by waiver, estoppel, or laches from challenging another's authority to act as director. With those principles in mind, we now review whether the jury's finding that Brown was not a director is against the great weight and preponderance of the evidence."

Safe Harbor

A director may also escape liability if he relies on advice of counsel or of a CPA, BOC §3.102, although one court has held that the advice must be in writing.

Majority Shareholder Rights

Majority shareholders have exactly the same rights and interests as shareholders that minority shareholders do. While minority shareholders are not generally in a position to abuse control of the corporation to diminish the majority's interests, the fundamental rights and interests of majority shareholders are not superseded by the minorities' rights and interests. When the legitimate interests of the corporation or of the majority come into conflict with those of the minority, neither the corporation nor the majority shareholder has any duty to put the best interests of the minority before its own. Many actions, deemed oppressive by a minority shareholder, might very well be nothing more than the legitimate exercise of majority shareholder's rights. If the minority shareholder is given information, the opportunity to participate, and the right to vote, there is nothing oppressive about the Houston Business Lawyer Eric Fryarmajority out-voting him. Furthermore, there are certain instances in which a minority does have the power to harm the legitimate interests of the majority and can use that leverage to obtain a disproportionate share of the benefits of ownership. Examples might include the minority shareholder's ability to disqualify the corporation's subchapter-S status or to interfere with the ability of the corporation to obtain credit. A few cases in other jurisdictions have held that the minority shareholder, in such situations, may be sued for oppressive conduct.

Next: Ritchie v. Rupe>

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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