TEXAS SUPREME COURT COMPLETES SWEEP OF SHAREHOLDER OPPRESSION CASES

Shagrithaya v. ARGO Data Resources, Inc.
Texas Supreme Court, No. 12-1012 (June 27, 2014)
Petition denied, ARGO Data Resources, Inc. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012)

Cardiac Perfusion Services, Inc. v. Hughes
Texas Supreme Court, No. 13-0014 (June 27, 2014)
Per curiam, reversing 380 S.W.3d 198 (Tex. App.—Dallas 2012)
Following its landmark decision in Ritchie v. Rupe, the Texas Supreme Court today rejected shareholder oppression claims in two additional cases. As reported last week, the Court in Ritchie held there is no cause of action for shareholder oppression in closely-held corporations under Texas common law, and that the statute referring to “oppressive” conduct by those in control of a corporation does not authorize any remedy other than a “rehabilitative receivership.” See Sua Sponte post regarding Richie. The results in both Shagrithaya and Cardiac Perfusion flowed directly from Ritchie.

Shagrithaya v. ARGO 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 Balkrishna Shagrithaya, who initially developed the company’s 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 became frustrated with Shagrithaya’s level of participation in the company and substantially reduced Shagrithaya’s salary. Martin later offered to have the company buy back Shagrithaya’s shares at fair market value, which Shagrithaya rejected as a “low ball” offer. Shagrithaya 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 then three-person board voted 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. The trial court held that Shagrithaya was oppressed by Martin’s conduct, and as an equitable remedy ordered an $85 million dividend.

On appeal, the Dallas Court applied the analysis of shareholder oppression it had previously articulated in Ritchie, distinguishing the 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 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 also found the trial court’s findings of “malicious suppression of dividends” and fraud were not supported by legally sufficient evidence. It therefore reversed and rendered judgment that Shagrithaya take nothing. Shagrithaya filed a petition for review in December 2012, and, without granting the petition, the Supreme Court requested briefing on the merits. One week after reversing the judgment in Ritchie, the Court denied Shagrithaya’s petition for review.

Cardiac Perfusion Services v. Hughes involved another two-shareholder corporation. Randall Hughes was an employee of Cardiac Perfusion Services (“CPS”), which is 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 were 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 January 2013, and the Supreme Court requested briefing on the merits (on the same day it did so in Shagrithaya).

On the same day it denied the petition in Shagrithaya, the Supreme Court issued a per curiam opinion in Cardiac Perfusion, granting the petition and reversing “the part of the court of appeals’ judgment affirming the trial court’s buy-out order and denial of Joubran’s and CPS’s request for declaratory judgment.” The Court noted, however, that when it rejected the common-law cause of action for shareholder oppression in Ritchie, it “did so in part because of the adequacy of other existing legal protections.” It therefore remanded to the trial court to allow the plaintiff an opportunity to pursue his claims as a derivative action, suggesting he “may have proceeded under the wrong legal theory,” but expressing “no opinion on whether Hughes can successfully pursue such a claim.” In light of the Court’s reversal of the denial of Joubran’s and CPS’s request for declaratory judgment on the Buy-Sell Agreement, their claim for attorneys’ fees under that statute is also revived.

Carrington Coleman represents the majority shareholders in both Shagrithaya and Cardiac Perfusion.

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