The Rights of Minority Shareholders When Faced With Common Forms of Oppression

When companies face business disputes, or when shareholders decide they want to sell their interest in the business and move onto new ventures, minority shareholders can often be limited in their ability to have a voice in the business, as well as to receive fair compensation when they decide to leave.

Indeed, many minority shareholders face abuse and oppression at the hands of majority shareholders in the business with controlling interests in the company. Minority shareholders need to understand common forms of shareholder oppression, and they also need to know about ways that they can move to ensure their own participation in the management of the company and in asserting rights when disputes arise.

At Wood Edwards LLP, our business litigation attorneys are committed to serving clients who are engaged in partnership disputes and need assistance with business dissolution, including minority shareholders. With years of experience handling cases related to minority shareholder oppression, we understand the need for fair business practices, and we can discuss strategies with you for maintaining an interest in the business.

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What is a Minority Shareholder, and Why Are Minority Shareholders Oppressed By Majority Shareholders?

The term “minority shareholder” in a closely held Texas business refers to a shareholder who does not have sufficient interest in the company to have control in relation to majority shareholders.

In some businesses, there is a single majority shareholder who exercises significant power over the company, while many other businesses have multiple shareholders whose interests in the business allow them to have control over business management, the board of directors, and other significant aspects and features of the business.

It is important to recognize that minority shareholders are still defined as such even when there are so many minority shareholders that, together, they may control a majority of the shares in the business.

For example, imagine that there are two shareholders in the business that each control 20 percent of the shares, and then there are 20 different minority shareholders who control the remaining 60 percent of the shares, but individually those minority shareholders only control 3 percent of the shares each. Taken together, and based on how the business is structured, the minority shareholders still may not have enough votes in order to exert any control over the majority shareholders.

In other words, the majority shareholders may own less than the total majority of the shares in the business, but they remain majority shareholders if they control the company’s management, board of directors, and other key elements of the business.

Even in closely held businesses where the total number of shareholders is relatively small (especially in comparison to large Texas corporations), the minority shareholders typically do not have power over business interests.

Understanding Minority Shareholder Oppression in Texas Businesses

Minority shareholder oppression refers to situations in which majority shareholders work together to oppress or disenfranchise minority shareholders in some way. Typically, closely held businesses in the Dallas area have a small group of majority shareholders who vote together, and they can take actions that can oppress minority shareholders. As a result of this dynamic, there are often business disputes that arise between and among shareholders in the company.

As a result of business disputes and other difficulties in a Dallas company, a minority shareholder can decide she wants to sell her shares and leave the business. However, this can be extremely complicated—and can result in shareholder oppression—when there is no shareholder agreement in place.

Given that minority shareholders do not have voting power or other control in the business, it can be extremely difficult to receive just compensation for the shares, as well as for their investment in the business. Indeed, minority shareholders can feel locked into the business when the majority shareholders refuse to purchase the shares at fair market value.

To prevent minority shareholder oppression, minority shareholders can enter into a shareholder agreement that can help to protect their interests.

Importance of Minority Shareholder Agreements

For protection against common forms of minority shareholder oppression, it is extremely important for minority shareholders to insist on a fair shareholder agreements. Without a shareholder agreement, there are few ways for a Texas minority shareholder to prevent majority shareholders from locking them in or trying to force minority shareholders to sell their shares at prices well below fair market value.

Under the recent Texas Supreme Court decision in Ritchie v. Rupe (2014) overturned an important Texas case, Davis v. Sheerin (1988), which gave a minority shareholder in closely held businesses the right to a fair buy-out of his or her shares when the minority shareholder was subject to oppression.

As you might know, Davis provided minority shareholders with important rights and the ability to have a remedy in the event of minority shareholder oppression. However, in overturning Davis, the Texas Supreme Court in Ritchie v. Rupe ruled that minority shareholders have no cause of action for oppression under Davis and that the Texas Business Organizations Code does not allow for a buy-out remedy.

The Ritchie decision clarified that the conduct of majority shareholders will only be considered oppressive “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.”

In other words, Ritchie significantly limited the ways in which minority shareholders can seek remedies for oppression, and it drastically narrowed the definition of minority shareholder oppression that was initially outlined in Davis. The Texas Supreme Court made clear that shareholder agreements are among the only ways through which minority shareholders can have any power:

“Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.”

Contact a Dallas Business Lawyer

If you have questions about shareholder agreements or remedies for minority shareholder oppression, an experienced Dallas business lawyer can assist you. Contact Lindquist Wood Edwards LLP for more information.