Before 2011, the Dallas Court of Appeals had not directly addressed the tort of shareholder oppression, although the cause of action had been accepted and applied by several other Texas courts. Between March 2011 and August 2012, the court issued three opinions in which judgment had been entered for plaintiffs on shareholder oppression claims, all of which are now pending before the Texas Supreme Court:
- Ritchie v. Rupe, 339 S.W.3d 275 (Tex. App.—Dallas 2011) (judgment affirmed in part, reversed in part), pet. granted, argument held Feb. 26, 2013, No. 11-0447 (Tex.)
- Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d 198 (Dallas 2012) (judgment affirmed), pet. filed, No. 13-0014 (Tex.)
- ARGO Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Dallas 2012) (judgment reversed and rendered), pet. filed sub nom. Shagrithaya v. ARGO Data Resource Corp., No. 12-1012 (Tex.)
These cases provide valuable insight into the Dallas court’s approach to this cause of action, and the supreme court’s decisions on review will significantly affect the development of Texas law on such claims.
Ritchie v. Rupe. The court in Ritchie adopted the cause of action for shareholder oppression as it had been applied by other Texas courts, beginning with Davis v. Sheerin, 754 S.W.2d 357 (Tex. App.—Houston [1st Dist.] 1988, writ denied), and articulated a framework for determining whether specific conduct may be considered “oppressive.” Specifically, the Dallas court held that the Rupe Investment Corporation (“RIC”) and its controlling shareholders “acted oppressively toward Ann [a minority shareholder] by refusing to meet . . . with prospective purchasers of [Ann’s] Stock because that conduct . . . substantially defeated Ann’s general reasonable expectation of marketing the Stock.” 369 S.W.3d at 414. The court held further that an order requiring RIC to redeem the minority’s shares was an appropriate equitable remedy, but “the trial court erred in ordering the Stock be purchased for a price that did not constitute fair market value.” Id. at 281.
Several aspects of the court’s analysis of liability for “oppressive conduct” are instructive. The court links the claim of shareholder oppression to the statutory provision authorizing a court-ordered receivership (where other remedies are inadequate) to rehabilitate a corporation if, inter alia, the court finds “the governing persons of the entity” engaged in “oppressive” actions. Tex. Bus. Orgs. Code § 11.404(a)(1)(C); see Ritchie, 369 S.W.3d at 285-86. Noting that the statute does not define “oppressive” actions, the court focused on a definition of shareholder oppression as “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.” Id. at 289 (quoting Willis v. Bydalek, 997 S.W.2d 798, 801 (Tex. App.—Houston [1st Dist.] 1999, pet. denied)).
Applying a classification articulated by Professor Douglas Moll, the court distinguished between generaland specific reasonable expectations. Id. at 290-91 (citing Douglas K. Moll, Shareholder Oppression and Reasonable Expectations: Of Change, Gifts, and Inheritances in Close Corporation Disputes, 86 Minn. L. Rev. 717, 765-77 (2002)). General reasonable expectations are those held by all shareholders by virtue of stock ownership, unless modified by a shareholders agreement or corporate governance documents. These include “the right to proportionate participation in earnings, the right to any stock appreciation, . . . the right to vote if the stock has voting rights,” and the right to sell stock to another person “at a mutually acceptable price.” Id. at 291-92. In contrast, “specific reasonable expectations require proof that a close corporation majority shareholder and a particular minority shareholder reached a mutual understanding about a certain entitlement the minority is to receive in return for its investment in the business.” Id. at 291 n.25 (quoting Moll,86 Minn. L. Rev. at 767).
Applying this analytical framework, the court found that because there were no restrictions on the sale of the company’s stock, Ritchie had a general reasonable expectation that she could market her stock to a third party. Id. at 294. The majority’s interference with that expectation (by refusing to meet with prospective purchasers) defeated that expectation and was therefore oppressive. Id. at 296. The court held, however, that the proper remedy for that oppressive conduct was to require the defendants to buy her stock at “fair market value,” not the undiscounted “enterprise value” ordered by the trial court. Id. at 301.
The petition for review of the Ritchie case has been fully briefed on the merits, and oral argument was held February 26, 2013. Petitioners argue, inter alia, that shareholder oppression is solely a statutory cause of action that cannot support non-statutory remedies such as a buy-out. They also argue that the majority’s conduct, properly viewed in context, was not “oppressive.” Respondents do not challenge the appellate court’s reversal of the amount of the buyout and remand for determination of the stock’s fair market value. The Supreme Court’s decision in Ritchie will greatly influence Texas jurisprudence on shareholder oppression, including other cases from the Dallas court.
Cardiac Perfusion Services v. Hughes. Randall Hughes was an employee of Cardiac Perfusion Services (“CPS”), which was owned and controlled by Michael Joubran. In 1992, Hughes purchased ten percent of the company; Joubran retained the other ninety percent. As a condition of the sale, the two shareholders signed a Buy-Sell Agreement providing that in the event Hughes’s employment was terminated his shares would be purchased by Joubran or the company at their book value as of the end of the preceding year. Many years later, a dispute arose, and Joubran fired Hughes. When CPS and Joubran sued for declaratory relief to enforce the Buy-Sell Agreement, Hughes counterclaimed for breach of fiduciary duties allegedly owed to him as a minority shareholder, which morphed into a claim of shareholder oppression on which he prevailed at trial. Based on jury findings concerning Joubran’s handling of the company’s assets, the trial court held Joubran’s conduct was oppressive. Hughes’s employment termination was not argued or found to be oppressive or otherwise improper. Rejecting Joubran’s argument that a buyout of Hughes’s shares in these circumstances should be governed by the Buy-Sell Agreement, the court ordered Joubran and CPS to buy Hughes’s shares in CPS for $300,000, the undiscounted “fair value” found by the jury. The Dallas Court of Appeals affirmed, quotingRitchie’s suggestion that a buy-out at undiscounted “enterprise value” may be an appropriate remedy when “a minority shareholder . . . has been forced to relinquish his ownership position by the oppressive conduct of the majority.”
CPS and Joubran filed a motion for rehearing asking the panel to reconsider whether the quoted language in Ritchie can be applied to a situation in which the minority shareholder was not “forced out” by the conduct found to be oppressive, but by a contractual provision triggered by the termination of his employment. That motion and a subsequent motion for en banc reconsideration were denied, and CPS and Joubran filed a petition for review in February 2013.
ARGO v. Shagrithaya. The third case in this trilogy also involved a corporation with only two shareholders, who had founded ARGO Data Resources in 1980. Max Martin is the CEO and owns 53% of the stock, and Bala Shagrithaya, who developed the core technology, owns 47%. For more than 25 years, Martin and Shagrithaya were the only directors. ARGO grew into a profitable business with substantial cash reserves; the two shareholders received generous salaries, but the company paid no dividends until 2004. In 2005, Martin substantially reduced Shagrithaya’s salary. Shagrithaya subsequently demanded that Martin or ARGO buy Shagrithaya’s shares with no minority discount, or that ARGO issue a $90 million dividend.
In December 2007, Shagrithaya sued Martin, asserting shareholder oppression, fraud, breach of fiduciary duty, breach of contract, and other claims in both individual and derivative capacities. In 2008, following a 1-1 stalemate on the board of directors, the two shareholders agreed to elect a third director, and that position was filled on a 53-47 vote. ARGO’s board then voted 2-1 to issue a $25 million dividend, with Shagrithaya dissenting in favor of a much larger dividend.
After a six-week trial ending in October 2009, the jury found for Shagrithaya on almost all claims, and found that ARGO should issue a $65 million dividend. The trial court accepted the verdict, found that Martin’s conduct was oppressive to Shagrithaya, and ordered an $85 million dividend as an equitable remedy.
On appeal, the court reiterated Ritchie’s discussion of general and specific reasonable expectations of minority shareholders, and reviewed all the acts found by the jury to determine if they were oppressive under that standard. The court held that the jury’s factual findings were supported by sufficient evidence, but none of the enumerated acts defeated Shagrithaya’s reasonable expectations (general or specific) as a minority shareholder. The court therefore reversed and rendered judgment that Shagrithaya take nothing on shareholder oppression (as well as all other claims).
Shagrithaya filed a motion for en banc rehearing, which was denied. Shagrithaya filed a petition for review in December 2012, to which the supreme court has requested a response. - Lyndon F. Bittle
Stay tuned for further developments in these cases
