TEXAS SUPREME COURT POISED TO WEIGH IN ON SHAREHOLDER OPPRESSION

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.)

ARGO Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012) (judgment reversed and rendered), pet. filed sub nom. Shagrithaya v. ARGO Data Resource Corp., briefs on the merits filed, No. 12-1012 (Tex.)

Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d 198 (Tex. App.—Dallas 2012) (judgment affirmed), pet. filed, briefs on the merits filed, No. 13-0014 (Tex.)
Before 2011, the Dallas Court of Appeals had not directly addressed the cause of action for shareholder oppression, although such claims had been adjudicated in other Texas intermediate appellate courts beginning in 1988. Between March 2011 and August 2012, the Court issued opinions in three cases in which judgment had been entered for plaintiffs on shareholder oppression claims in the trial court, with mixed results on appeal. All three cases have now been fully briefed in the Texas Supreme Court, which has not previously adopted or defined the parameters of shareholder oppression. The Supreme Court’s decisions in these cases will significantly affect the development of Texas law on such claims.

Ritchie v. Rupe. The Court of Appeals in Ritchie adopted the cause of action for shareholder oppression as it had been applied by other Texas courts beginning in 1988, 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.” 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.”

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 the court finds “the governing persons of the entity” engaged in “oppressive” actions. 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.”

Applying a classification articulated by Professor Douglas Moll, the Court distinguished between general and specific reasonable expectations. General reasonable expectations are those held by all shareholders by virtue of stock ownership, unless modified by a shareholder 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.” 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.”

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. The majority’s interference with that expectation (by refusing to meet with prospective purchasers) defeated that expectation and was therefore oppressive. 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.

The petition for review in Ritchie was initially denied, then granted; the case has been fully briefed on the merits, and oral argument was held February 26, 2013. Petitioners argue, among other things, 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. They challenge the appellate court’s reliance on the “reasonable expectations” test, and argue that oppression should be defined as conduct that is “burdensome, harsh, or wrongful . . . a violation of fair play”—a standard that other defendants have criticized as too vague and subjective.

ARGO v. Shagrithaya. The second case in this trilogy 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 and other claims in both individual and derivative capacities. A year later, ARGO’s board 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 held that Shagrithaya was oppressed by Martin’s conduct, and as an equitable remedy ordered an $85 million dividend (increasing the jury’s finding by $25 million, and crediting a $5 million dividend issued before judgment was entered).

On appeal, the Dallas 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. Shagrithaya filed a petition for review in December 2012. Without granting the petition, the Supreme Court requested briefs on the merits, the last of which was filed October 10, 2013.

Petitioner Shagrithaya argues, among other things, that the Court of Appeals erroneously failed to consider the alleged oppressive actions as a “pattern” of conduct, and usurped the role of the jury in reversing judgment. Respondents contend the Court properly held the conduct found was not oppressive as a matter of law, particularly in light of the substantial dividends and additional compensation Shagrithaya had received prior to trial. Shagrithaya asks the Supreme Court to hold that determining whether conduct is oppressive is a question of fact, not of law, and that oppressive conduct cannot be “cured” by actions taken after the lawsuit is filed.

Cardiac Perfusion Services v. Hughes. This case involves another two-shareholder corporation. 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. In connection with that 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 shareholder oppression. Hughes’s employment termination was not argued or found to be oppressive or otherwise improper. Based on jury findings concerning Joubran’s handling of the company’s assets, the trial court held Joubran’s conduct was oppressive. 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.

CPS and Joubran filed a petition for review in February 2013, and although the Supreme Court has not granted the petition, the case was fully briefed on the merits as of August 27, 2013. Petitioners argue that the lower courts erred in allowing an equitable remedy for shareholder oppression to supplant the terms of a buy-sell agreement between the parties, and that both the finding of oppression and the determination of “fair value” were fatally dependent on conclusory speculations by Hughes’s expert witness. Respondent contends the judgment can be affirmed solely on the grounds that Joubran’s conduct was “burdensome, harsh, or wrongful.” According to Hughes, Petitioners’ criticism of the expert testimony reflects a disagreement between experts, and the objections to that testimony were not preserved for appeal.

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