Texas Supreme Court Restricts "Shareholder Oppression" Cause of Action

25 June 2014 Publication
Author(s): Todd A. Murray

On June 20, 2014, the Texas Supreme Court delivered its written opinion in Ritchie v. Rupe, No. 11-0447, holding (1) Texas does not recognize a common-law cause of action for minority “shareholder oppression” and (2) the appointment of a rehabilitative receiver is the only remedy for oppressive actions by corporate management.

Ann Caldwell Rupe, a minority shareholder in a closely-held corporation, brought suit against the controlling shareholders, asserting claims for breach of fiduciary duty and oppressive conduct, and seeking the appointment of a receiver to liquidate the corporation. At trial, the jury found in Ms. Rupe’s favor on essentially all of her claims, and found the fair value of Ms. Rupe’s stock to be $7.3 million. The trial court found that the alleged oppressive conduct was likely to continue and that the most equitable remedy was to require the corporation to redeem Ms. Rupe’s shares. The court of appeals affirmed the finding of oppressive conduct, but concluded the trial court had erred by instructing the jury not to discount the value of Ms. Rupe’s shares for the lack of marketability and control.

The Supreme Court reversed and remanded. The Supreme Court’s opinion holds that Tex. Bus. Orgs. Code 11.404 creates a single cause of action with a single remedy: an action for appointment of a rehabilitative receiver. In so holding, the Court curtails a minority shareholder’s ability to use the threat of a court-ordered buyout to extract unwarranted value from majority shareholders. Without a common-law cause of action, shareholders are limited to the confines of Tex. Bus. Orgs. Code 11.404(a)(1). While the statute allows appointment of a receiver in response to “oppressive” conduct, the Court also held “oppressive” in this context means instances in which the majority abuses their authority with the intent to harm the interests of one or more shareholders in a manner that does not comport with the honest exercise of their business judgment. This is a far more restrictive definition than applied by previous court of appeals decisions.

For additional information, please contact Gardere Trial Partner Todd A. Murray (tmurray@gardere.com or 214.999.4862).

Related Services