Waiting for the Texas Supreme Court to Define (or Reject) Minority Shareholder Oppression
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The Texas Supreme Court is currently considering three cases that could drastically alter the legal landscape for owners of closely-held corporations. Each case was brought by a minority shareholder alleging that the majority shareholders had wielded their power so as to unfairly prejudice or “oppress” the minority. The minority shareholders all prevailed in front of Dallas juries on the theory of “shareholder oppression,” but then had mixed results in the Dallas Court of Appeals. The Texas Supreme Court (the “Court”) is now considering all three cases and will, many hope, bring some clarity to this undefined, yet potentially very powerful, cause of action.
“Two guys go in on a bar.” This could either be the start of a bad joke or a petition for shareholder oppression. But imagine that two guys do go in on buying a bar. Jack puts in $55,000; Daniel puts in $45,000; and they become 55%/45% shareholders. They initially contemplate that Daniel will tend bar and Jack will keep the books, and that they will take their money out in modest salaries. But the two have a falling out, and Jack uses his majority vote to fire Daniel, depriving Daniel of the ability to earn his salary. Also now that Jack has to tend bar too, he doubles his own salary such that there is no extra money to pay to Daniel in “dividends.” The bar is never going to make enough money to pay Daniel back his $45,000 investment. Does Daniel have a remedy for this alleged “oppression”?
The answer to this and many other questions about shareholder oppression are unclear. Business owners can only speculate whether the Court will adopt the theory of shareholder oppression and if so, how it will define the rights and duties of those in control of a closely-held company. For example, can a group of shareholders who are dissatisfied with the job performance of another shareholder terminate that shareholder’s employment? What if that is the only way the minority shareholder is receiving a return on his investment? Can they consistently vote their shares together so as to out-vote the minority on all important decisions? Can they exercise the buy-out rights set out in a shareholders’ agreement in a way that seems “harsh and unfair”? How far must those in the majority go to help facilitate the minority’s sale of his stock to a third party? The answers may depend on how “oppressive conduct” is ultimately defined.
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