“Equity will not suffer a right to be without a remedy.” The United States Supreme Court has observed:
That the vast and increasing proportion of the active business of modern life which is done by corporations should call into exercise the beneficent powers and flexible methods of courts of equity, is neither to be wondered at nor regretted; and this is especially true of controversies growing out of the relations between the stockholder and the corporation of which he is a member. The exercise of this power in protecting the stockholder against the frauds of the governing body of directors or trustees, and in preventing their exercise, in the name of the corporation, of powers which are outside of their charters or articles of association, has been frequent, and is most beneficial, and is undisputed. These are real contests, however, between the stockholder and the corporation of which he is a member.
In Yeaman v. Galveston City Co., the Texas Supreme Court held that the plaintiffs were entitled to bring a breach of trust claim to “to enforce their rights as stockholders” —specifically to obtain a determination of how many shares the plaintiffs owned and, presumably, a mandatory injunction to have the certificates issued. Under Texas law, a shareholder is entitled to equitable relief compelling the corporation to acknowledge the shareholder’s ownership and to issue share certificates in his name. The plaintiff “may sue in equity for specific performance to enforce the issue and delivery of the stock certificate and the payment of any dividends that may be due thereon, or he may, as plaintiffs have here done, sue to recover the consideration paid for the stock.” However, a shareholder’s rights entail more than just the right to hold a certificate, and the corporation’s duties extend to “not attempting to impair his interest.”
A court of equity has extremely broad powers to remedy a breach of trust. Courts have the power to intervene in the case of an “abuse of discretion” by trustees “and adjust the rights of the parties and to compel, if necessary, action on the part of the trustees.” Therefore, a court of equity would be empowered to fashion appropriate remedies to deal with specific violations of shareholder rights. “Certainly the rule allowing such equitable remedies to protect relationships of trust encompasses the ability to fashion such remedies against those who would conspire to abuse such relationships.” One example of such a remedy would be a mandatory injunction of the kind ordered by the Supreme Court in Patton v. Nicholas requiring payment of dividends and continuing jurisdiction of the trial court to enforce the injunction, with the Court held was necessary to remedy a wrong “akin to breach of trust.” Through the use of injunctive relief, courts may remedy specific instances of oppressive conduct. In fashioning the remedy, courts have the inherent power of “tailoring the remedy to fit the particular case,” taking due regard of “the malicious character of the misconduct heretofore involved and the consequent possibility of its repetition.”
Actual damages are recoverable as a remedy for breach of trust, as they are for other examples of breach of fiduciary duties. The court in Morrison v. St. Anthony Hotel held that the plaintiff, a former minority shareholder, could recover damages sustained while he was still a shareholder based on a “breach of trust theory.” Specifically, the plaintiff was entitled to recover the amounts which should have been declared as dividends based on the net earnings actually achieved and amounts that would have been available for distribution but for the misconduct of the corporation and its majority shareholder who “maliciously mismanaged the corporation for the wrongful purpose of reducing the minority’s earnings and to suppress their dividends.”
Injunctions and damages may remedy or curb particular abuses, but they leave the minority shareholder trapped in the closely-held corporation and subject to continued abuse by the majority. One of the remedies for breach of trust available to courts would be to order rescission of the plaintiff’s investment and restitution of the consideration paid, if it is possible to restore the status quo ante. The rescission remedy would provide the minority shareholder with an exit and thus effectively put an end to a pattern of oppression The court in Duncan v. Lichtenberger utilized this remedy, rescinding the incorporation of the parties' partnership and restoring to the minority shareholders their share of the partnership equity and the cash they had invested in the corporation. The court in Gage v. Rosenbaum employed a similar remedy. The trial court in Patton v. Nicholas did the same thing based on a finding of fraud. As with all equitable remedies, the court would be required to balance the equities. Where the corporation has been in business only a short time and has not increased in value, or where the minority shareholder's investment is substantial, rescission and restitution might be an appropriate remedy for breach of trust. However, in most cases, mere return of the minority shareholder's investment would work an injustice, in effect judicially ordering a squeeze-out in which the majority shareholder obtains 100% ownership and pays the minority a fraction of the value for this shares. Where the shareholders have been compensated well below the market value of their services--investing the value of their services into the corporation--rescission of the investment, coupled with restitution of the value of the services based on quantum meruit, might also provide a just remedy for breach of trust.
In most cases of oppression, where the plaintiff is at the mercy of a majority that has and will continue to utilize the corporation to impair and destroy all benefit of share ownership to the minority, the only adequate remedy is to buy-out the plaintiff for the fair value of what he has lost. As the court held in Davis v. Sheerin, “Texas courts, under their general equity power, may decree a ‘buy-out’  where less harsh remedies are inadequate to protect the rights of the parties.” While the Texas Supreme Court in Ritchie v. Rupe eliminated the shareholder oppression buy-out remedy by holding that the remedy was not available under the receivership statute and that there was no stand-alone shareholder oppression cause of action in the common law, the Court did not hold that a buy-out order was not available as an equitable remedy for other causes of action. Nothing in the Ritchie opinion questions the equitable power to order a buy-out as stated in Davis. On the contrary, the Ritchie Court expressly suggested that the remedy might be available for breach of an informal fiduciary duty between shareholders arising from a relationship of trust and confidence, and did not foreclose a buy-out order as part of a receiver’s rehabilitation of a corporation.
Nevertheless, a compulsory buy-out is an extreme remedy. The Ritchie Court questioned the dissent’s assumption that a court-ordered buy-out was a “lesser remedy” than appointment of a rehabilitative receiver, noting that the remedy had been criticized by some commentators as sometimes threatening the financial security of closely-held corporations, even pushing them into bankruptcy or dissolution. The buy-out remedy should only be available in very serious cases where the remedy is truly justified and where lesser remedies are insufficient.
Based on pre-shareholder oppression cases, two types of situations would seem most appropriate for a compulsory buy-out. First, when the corporation, not only impairs the shareholder’s interests but actually attempts to extinguish them, a buy-out would seem the only appropriate remedy. A corporation’s refusal to acknowledge a shareholder’s ownership or denial that one is a shareholder is a violation of the shareholder’s property rights and of the corporation’s duties as trustee. As the Supeme Court noted in Yeaman, a corporation is absolutely prohibited from any attempt to forfeit the ownership interests of a stockholder. In Rio Grande Cattle Co. v. Burns , the Texas Supreme Court held that a corporation’s refusal to recognize the ownership interest of a shareholder constituted the tort of conversion and entitled the shareholder to either compel the formal issuance of share certificates or to receive in assumpsit the value of what was taken, the fair market value of his shares. This is the functional equivalent of an equitable buy-out order. In Davis v. Sheerin, the majority shareholder denied that the plaintiff was a shareholder and was found by the jury to have conspired to deprive the plaintiff of his ownership in the corporation. This conduct, the court held, would “totally extinguish” all rights and expectations of share ownership and justified a court-ordered buy-out. Had the case been tried as a breach of trust case, the result should have been the same.
The other situation which should warrant the remedy of a buy-out is when the corporation admits that the plaintiff is a shareholder but conducts its activities so as to eliminate his share ownership as a practical matter by systematically ignoring his property rights and violating its duties to preserve them—no voice, no information, no share in corporate profits. These kinds of corporate actions fundamentally change the nature of the minority shareholder’s investment. In Texas common-law, the buy-out remedy was available in ultra vires cases in which the corporation caused such a fundamental change in the nature of the investment. In cases decided prior to the passage of statutes governing corporate mergers and providing rights of dissent and appraisal remedies, Texas courts held that a corporation could not consolidate into another corporation “and impose responsibilities and hazards upon the minority not contemplated by the original enterprise;” it could not “force a minority into such a scheme against their will, or compel them to accept an arbitrary value for their shares.” International & Great Northern Railroad Company v. Bremond was a suit by a shareholder in the Houston & Great Northern Railroad Company against that corporation, its former directors, and the corporation surviving the merger, International & Great Northern Railroad Company. The plaintiff subscribed for $100,000 in stock in 1870 and had paid $40,000 in installment payments at the time of the merger. At the time the plaintiff invested, the corporate charter did not provide for the ability to consolidate with another company. In 1874 though, the directors voted to merge the corporation with the International Railroad Company, under the name of the “International & Great Northern Railroad Company.” The legislature subsequently granted the new company a new charter and legalized the merger. The plaintiff objected to the merger and sued for the value of his interest, which he claimed was worth $50,000, and after a bench trial was awarded $43,182.30. The appeal was taken to the Texas Supreme Court.
In addition to defending the legality of the merger, the defendants attacked the plaintiffs’ lawsuit, claiming that it must be brought for the benefit of the corporation rather than as an individual action. The defendants asserted that the “only cause of action which dissenting stockholders have, upon an ultra vires act, is in equity, and to compel restitution to the corporation, and not to themselves, that the “plaintiff was not, in any case, entitled to recover damages payable to him personally,” and that, even if the consolidation was ultra vires, it did not allow the plaintiff to rescind his subscription. The plaintiff argued that the merger “was ultra vires [under] the charter under which he became a stockholder,” that it was “a breach of trust towards a stockholder in a joint stock incorporated company, established for a certain definite purpose by its charter, if the funds or credit of the company are diverted from such purpose, although the misapplication be sanctioned by a vote of a majority of the stockholders”, and that for “this breach of trust” the “dissenting stockholders have a cause of action against [the directors] and the company participating with them in the conversion and breach of trust.”
The Texas Supreme Court agreed with the plaintiff, holding first that the consolidation was “unauthorized and wrongful as to Bremond, an objecting stockholder of the former company, and having been consummated by a wrongful appropriation of his equitable interest by the consolidated company, that company became equitably liable to him therefor.” The plaintiff, however, was “not entitled to the personal judgment against the director recovered by him. The consolidation was the act of the stockholders, other than the plaintiff, and was therefore an act for which the directors, as such, should not be held responsible. As directors they were answerable to the corporation for official delinquencies resulting in damage to the corporate property.” But the plaintiff was entitled to an equitable award of monetary damages against the corporation for the value of his shares.
The defendants argued that the plaintiff should be limited to the market value of his stock, but the Court rejected that argument because it appeared that “sales by subscribers were too rare to give the stock a market value. The inquiry should have extended to the actual value of stock, and as tending to show that value, the defendants were at liberty to show the true assets and liabilities of the Houston & Great Northern Railroad Company.” The Court concluded that the trial court precluded the defendants from offering certain financial evidence about the corporation and reversed and remanded for a new trial. “On another trial, the inquiry should be as to the real value of Bremond’s equitable interest in the Houston & G. N. Railroad Co., or the real value of his stock at the time the consolidation was practically effected; or at any period thereafter up to the institution of his suit. His recovery should not exceed that value, with interest, from the institution of the suit.” One commentator noted of Bremond: “This case is the only Texas decision prior to the adoption of the Business Corporation Act dealing with a party that can be analogized to a dissenting shareholder. It should be noted that the relief granted is identical to the recovery permitted under the appraisal procedure.” Effectively the same relief was developed in shareholder oppression cases by means of the equitable buy-out remedy.
Therefore, an equitable buy-out should certainly be available in a case like Boehringer v. Konkel, where the majority shareholder wrongfully interfered with the plaintiff’s rights to information, and wrongfully denied plaintiff’s right to “proportionate participation in the company’s earnings as a shareholder” through withholding dividends and granting himself “a de facto dividend” of excessive compensation to the exclusion of the minority shareholder, where the majority shareholder caused the corporation to impair the minority shareholder's interests, violate its duty of impartiality, and effectively deprived the plaintiff of his stock ownership rights. Such oppressive conduct effectively results, in the words of the Yeaman opinion, in the “appropriation by the corporation” of the minority shareholder’s “his stock or its fruits.” Such oppressive conduct so fundamentally changes the nature and terms of the investment for the minority shareholder—so thoroughly “defeats the expectations that objectively viewed were both reasonable under the
circumstances and were central to the minority shareholder’s decision to join the venture,” if you will—so as to “control [the corporate] powers to pervert or destroy the original purposes of the corporators,” “impose  hazards upon the minority not contemplated by the original enterprise,” and to “force a minority into such a scheme against their will, [and attempt to] compel them to accept an arbitrary value for their shares.” In such cases, a buy-out should be ordered as an equitable remedy for the corporation’s breach of trust.
|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||
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.