Corporations can do nothing and can decide nothing apart from their human agents. The legal personhood of a corporation is a fiction. When a corporation commits breach of trust against a minority shareholder by taking an action that impairs minority shareholder interests with the intent of harming the minority owner or favoring the majority owner, the "intent" of the corporation is really the intent of the directors making the decision, and the intent of those directors is dictated by the majority shareholder who controls the composition of the board and is the real decision maker. The former shareholder oppression doctrine used the court's equitable power to cut through the fictions and deal with the reality by imposing duties directly on the majority shareholder to the oppressed minority and allowing the oppressed minority an equitable remedy directly against the majority owner. In striking down the shareholder oppression doctrine, Ritchie v. Rupe has taken Texas law back to a place where the corporate fiction is treated very seriously. Because of the legal structure of the corporation, the majority shareholder owes no legal duty to the minority shareholders, and the directors controlled by the majority shareholder owe duties only to the corporation. Oppressive conduct directed at minority shareholder by directors and majority shareholders violates no legal duties, and the minority shareholders have no legal remedy against the oppressors. However, the corporation does have legal duties to each of its shareholders, and shareholders do have a remedy for breach of trust against the corporation. Under this legal scheme, what responsibilities do the majority business owners have when they cause the corporation to breach its duties of trust?
In fiduciary litigation in other contexts, conduct that constitutes a breach of fiduciary duties to the plaintiff is committed by several persons, not all of whom owe the fiduciary duties to the plaintiff. In those situations, defendants, who themselves do not owe any duty to the plaintiff, do not escape liability when the cause, assist, or participate in the breach of fiduciary duties by one who does owe such duties. Texas courts have long held: “It is settled as the law of this State that where a third party knowingly participates in the breach of duty of a fiduciary, such third party becomes a joint tortfeasor with the fiduciary and is liable as such.” In Cotten v. Weatherford Bancshares, Inc., in the shareholder oppression context, the Fort Worth court of appeals applied this doctrine to hold corporate officers jointly and severally liable for oppressive conduct against minority shareholders: “A corporate officer may be held individually liable for a corporation’s tortious conduct if he knowingly participates in the conduct or has either actual or constructive knowledge of the tortious conduct.”
If the minority owner proves a breach of trust by the corporation was caused by the majority owner, then that majority business owner will be held responsible for knowing participationg in the corporation's breach of its quasi-fiduciary duties. If monetary relief is granted, then the majority shareholder may be jointly and severally liable. If injunctive relief is granted, it may be directed against the majority shareholder.
In Yeaman v. Galveston City Co., the plaintiff brought a claim against both the corporation and its president. Presumably, the relief granted would have been awarded against both defendants, although there is no discussion of that issue in the opinion. In Cates v. Sparkman, the Court held that the plaintiff had failed to state a claim in his lawsuit brought against the corporation, its directors, and its majority shareholders, but clearly recognized that an individual cause of action would exist based on "oppression on the part of the company or its controlling agency." In Patton v. Nicholas, the plaintiffs proved a breach of
trust by the corporation by maliciously suppressing dividends. The Supreme Court ruled that the corporation should be ordered to pay dividends, but also expressly granted injunctive relief against the majority shareholder responsible for the malicious conduct. In Morrison v. St. Anthony Hotel, the court of appeals held that a former shareholder had a damages remedy for breach of trust by malicious suppression of dividends both against the corporation and its directors and majority shareholder.
|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.