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Proving Oppression of a Minority Shareholder

How did a plaintiff prove oppression of a minority shareholder under the former Shareholder Oppression Doctrine? Evidence of oppressive conduct.

Proving Oppression of a Minority Shareholder

Evidence of Oppression of a Minority Shareholder

How did a plaintiff prove oppression of a minority shareholder? What evidence was sufficient? Who had the burden. Even after Ritchie v. Rupe, plaintiffs will still face these evidentiary challenges under other causes of action. Therefore, it is necessary to examine how the burden of proof worked under the former Shareholder Oppression Doctrine.

Proving Shareholder Status

The first fact that must be established is that the plaintiff is in fact a shareholder. In many cases, this is the central issue. Because the legal duties arise from the formal relationship of minority shareholder to the corporation and because shareholder status is the prerequisite to asserting any claim on behalf of the corporation, proof of share ownership is critical.  However, as will be shown below, contesting share ownership is a risky defense strategy.  If the plaintiff convinces the court that he is a shareholder, then the defendant’s refusal to recognize the share ownership will be strong evidence of oppression of a minority shareholder.

Unperformed Agreement to Issue Shares

Very frequently, the minority shareholder is an employee who has made an agreement to earn his ownership interest over time.  After the employee has performed his part of the agreement, the majority shareholder may regret the deal and delay or refuse to issue the shares.  This was the situation exactly in Willis v. Donnelly. In that case, the defendant was the sole shareholder of a corporation that was established to operate a day spa.  The defendant contracted with the plaintiff, who owned a successful hair salon, to give up his existing business and to transfer his staff and customers, for which the plaintiff would receive a 25% ownership in the corporation as soon as the new business reached a certain revenue goal. However, defendant soon regretted this agreement, because the costs and capital requirements were much greater than anticipated, and when the revenue targets were reached the corporation was still losing money. The defendant demanded that the plaintiff “act like an owner” by contributing capital or assuming some of the debt and was frustrated when the plaintiff refused to do so.  Therefore, the defendant delayed issuing the stock and later persuaded the plaintiff to consent to the delay so that the defendant could get all the tax benefits of the losses from the S corporation. Ultimately, the plaintiff was fired without ever having received his shares. The Supreme Court reversed a judgment for the plaintiff for breach of fiduciary duty, holding that no duties arose because the plaintiff was never a shareholder. Based on this holding, the plaintiff’s only claim was for breach of the contract to issue the shares, which greatly restricted the remedies available to the plaintiff and probably diminished the potential recovery.

When does one become a shareholder? The transfer of share ownership is a matter of contract.  When there is a “manifest intention of the parties to this enterprise” that a person is a shareholder, then he is a shareholder. The Texas Supreme Court has held:  “He becomes a full stockholder, certainly where he has performed his obligation, and possession all of a stockholder’s right, even if no certificate is issued to him at all In Greenspun v. Greenspun, an employee of a corporation claimed that that the sole shareholder of the corporation had conveyed 500 shares to him; the sole shareholder denied that such a conveyance had taken place and relied on the fact that he had possession of all the stock certificates while the employee had none.  The jury found that there was an agreement to transfer 500 shares, and the court of appeals held that, as a legal matter, “transfer of title may take place though there is no delivery of the certificates themselves, nor endorsement of them, nor transfer of them on the books of the corporation, and even though the sale be by parol.” In affirming the lower court’s opinion, the Texas Supreme Court specifically adopted this portion of the opinion.

The plaintiff in Willis v. Donnelly should probably have argued that he became a shareholder by virtue of the Letter Agreement the moment that the revenue target was reached, that the agreement to transfer ownership was essentially self-executing.  However, that argument was precluded by the theory that the defendant had breached the Letter Agreement by not issuing the shares, which the jury found was the fact. Furthermore, the undisputed evidence was that the transfer of ownership was delayed (not merely the issuance of share certificates) so that the defendant could continue to enjoy the tax benefits of the corporation’ losses, which would have to be shared with the plaintiff once the plaintiff became a shareholder. Therefore, in Willis v. Donnelly, it was clear on that record that ownership had not been transferred to the plaintiff.

Stock Ownership Not Recorded

Another very common factual situation in closely-held corporations is that stock certificates are never formally issued.  Often the blank stock certificates simply stay in the corporate book.  Sometimes the owners even neglect to create a stock ledger showing the names and number of shares held by each shareholder, or the owners fail to keep the ledger up to date with subsequent transfers or issuances.  When disputes arise later, the majority shareholder is sometimes tempted to claim that the minority shareholder is not a shareholder because the minority shareholder does not have a share certificate or because the minority shareholder’s interest is not recorded in the corporate books.  As a legal matter, the issuance of the stock certificate is not necessary for a person to be a shareholder. In Yeaman v. Galveston City Co., the Texas Supreme Court held:  “In a corporation the certificate of stock is not the stock itself; it is but a muniment of title, an evidence of ownership of the stock.  It is not necessary to a subscriber’s complete ownership of the stock.” The same is true with regard to the stock ledger.

Oppression of a Minority Shareholder—Definition of Oppressive Conduct

The standard definition of the elements of minority shareholder oppression is as follows: 

1. [M]ajority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to join the venture; or

2. [B]urdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely.

However, as the court noted in Davis v. Sheerin, “Oppressive conduct has been described as an expansive term that is used to cover a multitude of situations dealing with improper conduct, and a narrow definition would be inappropriate.” “Courts may determine, according to the facts of the particular case, whether the acts complained of serve to frustrate the legitimate expectations of minority shareholders, or whether the acts are of such severity as to warrant the requested relief.” “Oppressive conduct is an independent ground for relief not requiring a showing of fraud, illegality, mismanagement, wasting of assets, nor deadlock, the other grounds available for shareholders, though these factors are frequently present.” “Moreover, a claim of oppressive conduct can be independently supported by evidence of a variety of conduct.”

Pattern of Minority Oppression and Continuance into Future

A claim of oppressive conduct to a minority shareholder can be independently supported by evidence of a variety of conduct. The finding of oppression of a minority shareholder is usually based on more than a single oppressive act.  Rather the courts focus on a pattern of conduct.  It is this pattern of conduct that proves that “the likelihood that [the oppressive conduct] would continue in the future,” “Likelihood that it would continue in the future,” “consequent possibility of repetition”

In Davis v. Sheerin, the court of appeals based its holdings that there was sufficient evidence of oppression and that it would continue in the future on “the jury’s finding of conspiracy to deprive appellee of his interest in the corporation, together with the acts of willful breach of fiduciary duty as found by the jury, and the undisputed evidence indicating that appellee would be denied any future voice in the corporation.” The pattern of oppressive conduct found by the court in Davis consisted of the following acts:  (1) denial of the minority shareholder’s right to inspect the books and records of the corporation; (2) the denial of the minority shareholder’s ownership interest, coupled with clear documentary evidence of ownership; (3) the intent to deprive the minority shareholder of his ownership interest, coupled with past attempts to purchase the shares; (4) misappropriation of corporate funds through contributions to a profit sharing plan solely for the majority shareholder, which the court characterized as “informal dividends;” (5) misappropriation of corporate funds to pay the majority shareholder’s attorney during the lawsuit, which the court characterized as “waste;” and (6) the majority shareholder’s statement at a board meeting that the minority shareholder’s “opinions or actions would have no effect on the Board’s deliberations.” This list is very interesting because items 1, 4 and 5 clearly have legal remedies, and the trial court did in fact award damages on all three claims.  Item 2 refers to the position that the defendant took in the lawsuit.  Items 2 and 3 did not result in any actual harm.  Finally, and most significantly, items 5 and 6, and to a large extent item 2, all occurred after the lawsuit was filed.  Half the oppressive behavior found significant by the court of appeals occurred in the defendant’s conduct of the lawsuit.  Clearly, the majority shareholder made things worse for himself by the way he reacted to and defended the lawsuit. 

In Willis v. Bydalek, although not stated by the Court as such, the absence of a pattern of conduct was probably decisive in the court’s reversal of the judgment of shareholder oppression.  In that case, the court emphasized that the judgment had been based solely on one oppressive act, that of firing the minority shareholder, and distinguished Davis v. Sheerin and Duncan v. Lichtenberger, on the grounds that each of those cases involved multiple acts of oppression.

However, later cases involving finding of oppression of a minority shareholder, such as the court of appeals decision in Ritchie v. Rupe and Boehringer v. Konkel, seemed to dispense with the pattern requirement and permit a finding based on a single oppressive act.

Loss or Damage Is Not Required

The recovery in a shareholder oppression claim is not dependent upon any actual, measurable loss or damage.  Davis v. Sheerin upheld a judgment based on oppression of a minority shareholder, even though the jury found the majority shareholder’s conspiracy to deprive the minority shareholder of his ownership interest was not a proximate cause of any damages.  Moreover, although the appellate court held that the evidence supported the trial court’s determination that the majority shareholder’s actions were oppressive, based in large part on the jury’s finding of a conspiracy to deprive the minority shareholder of his share interest in the corporation, the appellate court was not troubled by the jury’s ultimate negative finding on the cause of action for civil conspiracy due to their failure to find that the conspiracy was a proximate cause of any damages.  “The court's judgment did not award damages based on a conspiracy cause of action. Instead, the court considered the various acts found by the jury and made a determination that such acts constituted oppressive conduct.” The court in Allchin v. Chemic, Inc. held that a “jury’s failure to award damages is not a factor” in the determination of whether there was minority oppression.

Burden of Proof

In Willis v. Donnelly the court of appeals held that it was proper for the burden of proof to be placed on the majority shareholder on the breach of fiduciary duty questions because “the profiting fiduciary has the burden to prove questioned transactions were ‘fair, honest, and equitable.’” 

Conduct Evidencing Oppression of a Minority Shareholder

Attempt to Deprive Stock Ownership

As the court noted in Davis v. Sheerin, “[C]onspiring to deprive one of his ownership of stock in a corporation, especially when the corporate records clearly indicate such ownership, is more oppressive” than traditional squeeze-out techniques because such conduct, if successful, “not only would substantially defeat any reasonable expectations appellee may have had …but would totally extinguish any such expectations.” Willis v. Bydalek also notes that attempting “to deprive the minority shareholder of his stock” is evidence of oppressive conduct. In Willis v. Donnelly, the court of appeals held that it was oppressive conduct for the majority shareholder to treat the minority shareholder as a nonowner because he had decided that the minority shareholder was “not acting like an owner” when the minority shareholder refused to contribute additional capital or to personally assume some of the corporation’s debt.

Attempts to Purchase at an Unfair Price

Davis v. Sheerin noted that prior attempts to purchase minority shareholder’s stock was evidence of majority shareholder’s “desire to gain total control of the corporation.” Note: controlling shareholders must be extremely cautious in engaging in pre-suit settlement discussions with an aggrieved minority shareholder.  An offer to purchase shares at an unfairly low price may become evidence of minority oppression.

Cash-Out Merger

“A merger or sale of assets that results in a "freeze out" of a shareholder is permitted by law, provided the transaction is properly approved by the requisite number of shareholders.” 

Loss of Employment

Willis v. Bydalek cast strong doubt on whether the firing of an at-will employee, and thus the denial of salary and denial of the right to participate, can be an act of oppression.  The court held that the strong at-will employment doctrine and the deference shown to management under the business judgment rule, prevent “firing alone” from constituting shareholder oppression in the sense of “burdensome, harsh, or wrongful conduct” or “visible departure from the standards of fair dealing.” The court leaves open the possibility that firing an at-will minority shareholder might be evidence of oppressive conduct as part of a pattern of other oppressive acts, particularly if the other shareholders are receiving money from the corporation and the firing prevents the minority shareholder from receiving any economic return. Furthermore, the court holds that the expectation of continued employment, without a contract, as a matter of law cannot constitute an “objectively reasonable” expectation. “Texas law does not recognize a minority shareholder's right to continued employment without an employment contract. All are presumed to know the law. Expectations of continued employment that are contrary to well settled law cannot be considered objectively reasonable.” To some extent, the court’s analysis begs the question.  A shareholder would have an objectively reasonable expectation of continued employment if there was an explicit or implicit agreement that continued employment is one of the benefits of stock ownership in this corporation.  In that case, there would be an employment agreement—“So long as you are a shareholder, you will have a job.”  This agreement, whether explicit or implied, would not run afoul of the Statute of Frauds because its term is indefinite. In Willis v. Bydalek, the court noted that the minority shareholder moved to Huntsville, Texas from Wisconsin and invested a substantial sum from his savings. From these facts, a strong argument could be made for an implied contract, but the record before the court of appeals did not support such a finding.

Defining limits of implied contract—for cause?

In Redmon v. Griffith, the court held: “The possibility exists that the firing of an at-will employee who is a minority shareholder can constitute shareholder oppression.” The court overturned a summary judgment on shareholder oppression, holding that the plaintiff could pursue a remedy for his termination of at-will employment within the context of his shareholder oppression claim. The minority oppression claim in that case alleged oppressive acts in addition to the termination of employment.

In Allchin, the plaintiff claimed that he was constructively discharged, “forced to resign,” as a result of the defendant’s misconduct.  The court’s opinion assumes that such a claim could be part of a pattern of oppression, but holds that the evidence conclusively demonstrated that the plaintiff resigned voluntarily.  “An employee who voluntarily leaves the employment of the corporation presents a less persuasive case for concluding the majority shareholders oppressed him.”

Impact of change in employment status

A relatively common occurrence is that co-shareholders in a closely-held corporation all work in the company and all participate in the company solely through salary, and then the situation changes so that the scheme of economic participation that all accepted in the past no longer works in an equitable manner.  Most commonly, this is because one of the shareholders no longer works in the company, whether by termination, resignation, retirement, disability, or death.  At this point, there should be a fiduciary duty to reconsider the past scheme of economic participation and come up with an alternative policy that fairly allows all to participate—usually, this would involve beginning to distribute profits by dividends, but could also involve payments on a consulting contract or some other mechanism to the non-employee shareholder.  In Braswell v. Braswell, the wife of the majority shareholder in a closely-held corporation was awarded shares in the company as a result of a divorce.  The wife argued that the division of the stock was not equitable because she was now a shareholder in a corporation that was subject to the control of her ex-husband.  The court noted that the corporation had never before paid dividends, but reasoned that both husband and wife had lived on the husband’s salary taken out of the corporation and that it would have been costly in taxes and unwise for the corporation to pay dividends prior to the divorce.  “We do not believe these facts raise a presumption that the corporation acting through its dominant officer and stockholders will not now regularly declare and pay reasonable dividends. If they should improperly refuse to do so, then any minority stockholder has his or her legal remedy.” 

Loss of Economic Return

The fundamental assumption of Texas law is that the shareholder has an economic purpose in acquiring his shares and that his reasonable expectations of an economic return should be protected. “The stockholder has a right to his share of the profits while the corporation is a going concern, and to a share of the proceeds of its assets, when sold for distribution in case of its dissolution and winding up.”  In Willis v. Bydalek, one of the key factors in the court’s holding that a minority shareholder’s loss of employment was not oppressive was that the firing did not represent any loss of an economic return on investment (although it did certainly represent a loss of salary to the minority shareholder). The court repeated emphasizes that the corporation lost money and that the other shareholder did not take a salary or any other money out of the corporation.  Therefore, there was no economic return to lose. 

Inequality Among Shares

Theoretically, shares in a corporation are fungible and all should have the same rights and benefits. As a practical matter, however, controlling shareholders are in a position to direct more than their fair share of benefits to themselves at the expense of the minority.  This is an area where there can be much confusion because of the overlapping duties of those in control.  A majority shareholder who deprives the minority shareholders of dividends by paying all the corporation’s profit to himself as a bonus may be paying a preferential dividend on his shares and oppressing the minority shareholder, but the same conduct may also breach a duty of loyalty to the corporation through excessive compensation.  The shareholders may sue in their own right for the oppression, but may only pursue the excessive compensation claim as a derivative claim on behalf of the corporation.  Ultimately, there is no real conflict in the legal theories.  The claim for oppression of a minority shareholder is not really based on the preferential dividend; rather that conduct is part of the proof of a pattern of oppressive conduct.  The court would not grant any specific remedy to compensate for the amounts wrongfully taken in the past.  The breach of fiduciary duty claim by the corporation, however, would be a claim specifically for the damages caused by the wrongful conduct.  Very frequently, an aggrieved minority shareholder will bring both claims, seeking to participate in the damages awarded to the corporation either through a court-ordered distribution or through an adjustment made to the value of the shares.

Inequitable Distributions through Constructive Dividends

Ordinarily, a claim that the officers or directors of a corporation took excessive compensation would be a claim belonging to the corporation.  However, a minority shareholder can also characterize the same conduct as the payment of “informal” or “constructive” dividends to the controlling shareholders.  The minority shareholders would be oppressed by the failure to pay them their share of the dividends.  In Davis v. Sheerin, court held that jury’s finding that “appellants received informal dividends by making profit sharing contributions for their benefit and to the exclusion of appellee” was evidence supporting a pattern of oppression. 

Texas courts have held: “A distribution by a corporation to its shareholders may constitute a dividend in law even though not formally designated as a dividend by the board of directors.” “[W]hether or not a corporate distribution is a dividend or something else, such as a loan, gift, compensation for services, repayment of a loan, interest on a loan, or payment for property purchased, presents a question of fact to be determined in each case.” In Ramo, Inc. v. English, the corporation distributed substantial sums of money to the controlling shareholder, which were recorded on the books as advances. Only the first advance was documented with a board resolution; none of the advances were evidenced by a promissory note; and apparently the advances were without interest.  The jury found that the controlling shareholder had no intention to repay the money. A lender contended that these distributions were not loans, but were actually dividends in violation of a covenant in the security agreement.  The Texas Supreme Court held that whether the distributions were loans or dividends was a question for the jury, but that the evidence would have supported a finding that the distributions were really dividends if a jury question had been submitted.

In Rivas v Cantu, the plaintiff sued the controlling shareholder for breach of contract and fraud for having failed to transfer 50% of the shares in a corporation as promised prior to incorporation.  The plaintiff claimed as damages 50% of the amount of “constructive dividends” that the controlling shareholder had received.  The court of appeals approved this measure of damages. The court noted that “a constructive dividend occurs when an expenditure is made by a corporation for the personal benefit of a stockholder, or corporate-owned facilities are used by a stockholder for his personal benefit” and that” the crucial concept is that the corporation conferred an economic benefit on the stockholder without expectation of repayment.” The court held that constructive dividends could be established by evidence of excessive compensation paid by the corporation to family members of the controlling stockholders; however, a constructive dividend does not occur automatically when a stockholder's family member works for the corporation, but only when that relative is overcompensated. There must be evidence that compensation was paid for work that was not done, or work that was not needed by the corporation, or that the compensation for the services performed was unreasonably high.

Inequitable Distributions Resulting from Harm to Corporation

In Willis v. Donnelly, the court of appeals held that a series of acts by the majority shareholder that harmed the corporation were oppressive because they were “purposeful actions to dilute the value of shares while employment the business and its assets solely for [the majority shareholder’s] own benefit. 

Inequitable Distributions Through Looting

In Redmon v. Griffith, the plaintiff’s pleading that defendants made improper loans to themselves, paid personal expenses from corporate funds, and paid excessive dividends to themselves was held to properly state a pattern of oppressive conduct against the minority shareholder. 

Inequitable Distributions Through Diverting Corporate Opportunities

In Redmon v. Griffith, plaintiff’s pleading that defendants diverted corporate opportunities was held to adequately state a claim for oppression of a minority shareholder. In Willis v. Donnelly, one of the oppressive acts was the majority shareholder’s purchase of the real estate on which the corporation had its facility.  The corporation had an option on the land, but the majority shareholder caused the corporation to waive the option at closing.  The majority shareholder then raised the corporation’s rent to pass on the full debt to the corporation.

Inequitable Distributions Through Excessive compensation

The court in Davis v. Sheerin, termed excessive salaries by controlling shareholders a “typical ‘squeeze out’ technique.” 

Inequitable Distributions Through Payment of Attorneys Fees

Frequently, in litigation over issues of corporate control or oppression of minority shareholders, the officers and directors in control of the company will view their indemnification rights as a means to use the resources of the corporation against its minority shareholders. Certainly, there is authority permitting the indemnification of officers and directors and providing that the corporation's expense of legal fees in defending a derivative suit is considered conduct within the ordinary business of a corporation. Thus, corporate officers may expend such sums in the defense of a derivative suit brought by minority shareholders. However, when the dust settles, the use of corporate fund to pay lawyers to protect or defend an effort by a majority shareholder to squeeze out a minority shareholder can become an independent basis for recovery. The corporation has no legal interest in the ownership of its shares, and in a dispute between shareholders as to ownership and control of the company, the corporation must occupy a neutral position. Texas courts have held that, ordinarily, a corporation has no special interest in the opportunity to purchase its own shares, and a director violates no duty to the corporation by dealing in its stock for his own account. This is because ‘a corporation, as such, has no interest in its outstanding stock or in dealings therein by its officers, directors or shareholders. If there is a struggle for control the corporation would normally occupy a neutral position.’ “We agree that in matters of control the corporation should occupy a neutral position. Therefore we do not concern ourselves with the parties' vigorous contentions and diagrams demonstrating who might or might not ultimately be ‘in control’ as a result of the trial court's, or this court's, decision.” Therefore, corporate officers and directors who use company friends to pay for the defense in disputes over the control and ownership of the company's shares are appropriating to themselves a personal benefit and are likely in violation of their duty of loyalty.

The Davis v. Sheerin court held that the finding that “appellants wasted corporate funds by using them for their legal fees” was evidence supporting a pattern of oppression. The court in Willis v. Bydalek also observed that “wasting corporate funds on personal attorney’s fees” is evidence of oppressive conduct. In Advance Marine, Inc. v. Kelley, the court held that the controlling shareholders’ use of “corporate funds to hire an attorney to represent them individually under the guise of representing the interests of the corporation” constituted “wasting corporate assets.” However, the court reversed an order that the defendants repay the corporation two-thirds of the attorneys expended because the plaintiff had not brought the action in a derivative capacity and because the plaintiff had obtained full relief by the order to purchase her stock and the order was unnecessary.

No Notice of Meetings

All shareholders have the legal right to be notified of shareholder meetings. BOC §21.353. Holding shareholder meetings without notice to a minority shareholder (or directors meetings without notice to a minority shareholder who is a director) certainly defeats a reasonable expectation of the minority shareholder.  Willis v. Bydalek notes that the failure to notify a shareholder of meetings is evidence of oppression.

Removal from Office

Willis v. Bydalek notes that the removal of a minority shareholder from a corporate office or directorship can be evidence of oppressive conduct, and distinguishes such removal of an officer from the firing of an at-will employee.

Denial of Participation

Davis v. Sheerin, held that the controlling shareholder’s denial of “any interest or voice in the corporation” was evidence of oppressive conduct.

Denying Right to Information

Cases of oppression of minority shareholders frequently involve denial of the right of inspection; however, most opinions take a broader view of of the minority’s right to and reasonable expectation of information.  Not only are specific violations common law and statutory rights to corporate information oppressive, but so is the practice of keeping a minority shareholder in the dark about the status of the company.  In Redmon v. Griffith, the refusal to give a minority shareholder access to financial statements prepared by the corporation’s CPA was evidence of oppression, which, in addition to evidence of using corporate funds to pay personal expenses was sufficient to overcome motion for summary judgment.

Violation of Express Contracts

In Willis v. Donnelly, the court of appeals held that the majority shareholder’s transfer of all his shares to his wife in breach of the minority shareholder’s right of first refusal under a written agreement was oppressive. The Willis court cited Thompson v. Hambrick for the proposition that the majority shareholder’s sale of shares without offering the right of first refusal to minority shareholders was a breach of fiduciary duty.  In Thompson, there was a written shareholder’s agreement that provided the majority shareholders with a right of first refusal on the minority shareholders’ shares.  The majority shareholders sold their shares without offering them to the minority.  The court held that the contract was ambiguous and that there was a fact issue as to whether the intention of the parties was that the right of first refusal was to apply to the majority shares as well.  The Thompson court’s holding that there was also a fact issue as to breach of fiduciary duties by the majority shareholder in selling their shares at a premium seems to be independent of the contract; however, the Willis court’s reading of the opinion as holding that breach of the contract was also a breach of fiduciary duties is plausible. The Willis court also held that the majority shareholder’s unilateral reduction of the minority shareholder’s salary to a level below that provided in the written contract and the majority shareholder’s delay in issuing the minority shareholder’s shares after he became entitle to them under the terms of the written contract were oppressive acts.

Attempt to Change Terms

In Willis v. Donnelly, the court of appeals held that the attempt by the majority shareholder to induce the minority shareholder to cap the amount of equity he was entitled to receive under a written contract at a lower amount was oppressive.

Bad Faith Financial Manipulation

In Willis v. Donnelly, another aspect of the pattern of minority oppression noted by the court of appeals was the majority shareholder’s keeping the corporation thinly capitalized, which limited its on-going ability to operate, and purchasing the real estate on which the corporation had its office for himself, rather than through the corporation.  The court of appeals reasoned that these acts were oppressive because both had the effect of reducing the price that the plaintiff would receive for his shares under the buy-sell provisions of a written agreement.

Minority Oppression Through Violation of Quasicontracts

Many cases relating to reasonable expectations of minority shareholders do not involve express agreements or statutory rights of share ownership, but implied agreements that arise as a necessary result of the circumstances under which the minority acquired his shares or as a result of the course of dealing of the parties.  In Willis v. Donnelly, the court of appeals held that one of the minority shareholder’s expectations that was “reasonable and central to the decision to join the venture” was that the majority shareholder would provide adequate capital to the business and that this reasonable expectation was defeated by the majority shareholder’s treatment of his capital contributions as loans and his keeping the corporation thinly capitalized. There was no express agreement as to the majority’s duty to contribute capital, but the court held that this duty was necessarily implied from promises made by the majority at the outset of the venture and by the operation of the buy-sell agreement, which had little value to the minority shareholder if the corporation was undercapitalized.

Malicious suppression of dividends

The decision to declare dividends is one that is well within the protection of the business judgment rule.  However, in a shareholder oppression context, the refusal to distribute corporate profits to the shareholders is oppressive if made with malicious intent.  The Texas cause of action for malicious suppression of dividends was recognized by the Texas Supreme Court in Patton v. Nicholas. The court held that “the malicious suppression of dividends is a wrong akin to breach of trust, for which the courts will afford a remedy.” Of particular importance to the court’s holding was the controlling shareholder’s state of mind.  The court held that “the finding of his control of the board for the malicious purpose of, and with the actual result of, preventing dividends” was supported by “quite adequate” evidence of a “wrongful state of mind.” This evidence included the following: that the minority shareholders came under personal attack to such an extent that they both felt compelled to resign, that the minority shareholders were not re-elected as directors following their resignation, that no dividends were paid, while the controlling shareholder continued to receive a very high salary, that the controlling shareholder made oral statements about the minority shareholder showing “strong personal ill will” and had stated that the corporation would not pay dividends so long as the plaintiffs were shareholders, and that the controlling shareholder had manipulated the business by increasing inventories and purchasing property to use up the corporation’s cash to the extent that the corporation’s surplus increased to 50% over five years and yet the corporation never declared dividends. There was also a jury finding that the controlling shareholder’s salary was “unreasonable.”

Davis v. Sheerin termed malicious suppression of dividends a “typical ‘squeeze out’ technique.” Redmon v. Griffith held that an allegation that defendants “maliciously suppressed the payment of dividends owed to them” adequately stated an oppressive act that demonstrated minority oppression. 202 S.W.3d at 235. In Willis v. Bydalek, the court cited other cases holding that the withholding of dividends, when the corporation had money to distribute to its shareholders, and the majority shareholders were getting a benefit, constituted evidence of oppression. The court’s analysis does not mention the requirement of maliciousness or bad faith, but rather focuses on the disparity in treatment between the majority and minority shareholders.

Monkeying with the books

Willis v. Bydalek notes that keeping the corporate books and records “inaccurately and inequitably” is evidence of oppressive conduct. 

False Accusations

Willis v. Bydalek notes that the falsely accusing a minority shareholder of wrong-doing so as to fire him for cause is evidence of minority oppression.

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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