Protection of Minority Shareholder Rights and Shareholder Oppression Doctrine in Texas

What can minority shareholders do in under Texas law to protect themselves against unfair treatment, including “squeeze-outs”, “freeze-outs” and the taking of disproportionate benefits by the majority? 

Texas recognizes both the shareholder oppression doctrine and “breach of fiduciary duty” theories in close corporations to protect the rights of minority shareholders.

The Dissolution Statute:

The Texas corporate dissolution statute, Article 7.05 of the Texas Business Corporation Act, provides for the appointment of a receiver and the possibility of dissolution when an aggrieved shareholder establishes illegal, oppressive, or fraudulent” conduct by directors or those in control. 

Of significance, Texas Courts have used this statute as a basis to fashion a broad range of remedies less harsh than dissolution, where they find that minority shareholder rights have been abused.

What is Oppressive Conduct?

Though illegal and fraudulent conduct is fairly easy to identify, oppressive conduct is less readily definable.  One of the leading cases in Texas, Davis v. Sheerin, adopts the language of New York’s Matter of Kemp for oppression, and defines “oppressive conduct” as follows:

  • Majority 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
  • Burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing with 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.

The Davis v. Sheerin court pointed out that the minority shareholder’s reasonable expectations must be balanced against the need to permit the corporation’s directors the freedom to exercise their business judgment in managing the company.  Absent exigent circumstances, a court will not ordinarily question the business judgment of those charged with running the company or the will of the majority, if it is properly exercised.

Thus, determinations of whether oppressive conduct has occurred are usually fact intensive and require a balancing of interests. 

In Redmon v. Griffith, a Texas appellate court held that allegations of

  • malicious suppression of dividends,
  • denial of access to financial information,
  • using corporate funds for personal purposes,
  • terminating a minority shareholder’s employment,
  • diverting corporate opportunities,
  • “‘squeeze-out’ techniques,  such as excessive payment of dividends . . . and attempts to deprive the [plaintiffs] of the fair value of their shares and of the benefits thereof”

could support a claim for shareholder oppression. 

However, Texas courts have noted that merely because a minority shareholder is fired from employment, this will not in itself warrant a finding of oppression.  For example, where the majority shareholder has also lost a significant amount of money in the enterprise, is not taking a salary, and the fired employee was an employee at will, a Texas court found that the minority shareholder was not a victim of oppressive conduct. 

Available Remedies:

The Texas Business Corporation Act provides for the appointment of a receiver with the eventual possibility of liquation, but it does not expressly provide for the remedy of a “buyout.” 

However, Texas courts have held that they have the authority to impose corporate buyouts and other remedies which are less extreme than dissolving the corporation.  For example, one court held that merely awarding damages and granting an injunction on oppressive conduct would not adequately protect the aggrieved shareholders, given the majority shareholders’ conspiracy to deprive them of their rights and interests in the corporation.  Thus, the court found that a buyout was the appropriate and necessary remedy in that case.

Texas courts have ordered a number of other remedies including:

  • a mandatory injunction requiring the corporation and the petitioner as its dominant officer and stockholder to declare and pay at the earliest practical date a reasonable dividend on the stock of the corporation;
  • an injunction requiring the distribution of future profits and accumulated surplus, provided that the payment of such dividends in not clearly inconsistent with good business practice;
  • the appointment of a receiver;
  • an injunction against the majority from contributing to a profit sharing plan for their benefit;
  • an order to sell corporate assets;
  • an award of damages for willful breach of fiduciary duty;
  • an award of costs, including costs of accounting;
  • attorney fees; and
  • an award of actual damages.