Reasonable Expectation that Management will Meet with Prospective Purchasers of Shareholder’s Stock
In Ritchie v. Rupe, 339 S.W.3d 275 (Tex.App.-Dallas 2011, pet. filed), the Texas Fifth Court of Appeals held that a minority shareholder in a closely held corporation can have a reasonable expectation that management will meet with prospective purchasers of her stock. Significantly, the Supreme Court of Texas has since granted petition for rehearing and review. If the petition for review is granted, it will be the first shareholder oppression case heard by the Court.
In Ritchie, there was no shareholders’ agreement in place restricting the minority shareholder’s right to sell. Initially, the shareholder, in an effort to sell, offered the stock to the corporation, but rejected the amount that the corporation was willing to pay as substantially below market. The shareholder then began to seek third-party purchasers through a broker, but the broker was informed that company management would not meet with any prospective purchasers. This made the stock virtually unmarketable, since it was unlikely that anyone would buy stock in a closely held corporation without first evaluating and obtaining information from management.
Looked at pragmatically, the refusal to allow management to meet with outside purchasers gave the other (majority) shareholders of the company the ability to pretty much dictate the price at which the minority shareholder could sell her shares.
The trial court held that this refusal constituted shareholder oppression and that the shareholder who wanted to sell was entitled to have its shares purchased by the company at “fair value.” In computing fair value, the court determined that no discounts for marketability or minority ownership status should be taken. Not surprisingly, the jury determined “fair value” using this formula to be more than seven times the company’s initial offer and more than four times its final offer— before the matter spiraled into litigation.
The appellate court affirmed the determination that the refusal to meet constituted oppression, but it held that under the facts of the case, minority and marketability discounts should be applied. The court reasoned that because the minority shareholder was voluntarily trying to sell an interest that was both minority and unmarketable, she did not expect to receive anything other than a price reflecting those discounts. This is different from a situation where a minority shareholder is being forced out, and where the shareholder would be entitled to her pro-rata share of the entire enterprise value, without any discounts being taken.