Wrongful Denial of Dividends to Minority Partners/Shareholders
Denying dividends (or profits) to minority partners or minority shareholders in a Texas business is one form of minority shareholder oppression. Without a shareholder agreement that provides protections for minority partners and minority shareholders—including specific information concerning when and how dividends will be paid—those minority shareholders can find themselves in extremely difficult positions.
Indeed, by refusing to provide a minority partner with profits and engaging in other oppressive tactics, the majority partner(s) or shareholder(s) can ensure that the minority shareholder has no power or control in the situation and ultimately “squeeze-out” or “freeze-out” the minority shareholder. Those terms refer to situations in which minority shareholders are not properly compensated for their investment in the business.
In Texas, the question of minority shareholder oppression and the wrongful denial of dividends is a complicated matter in the aftermath of the Texas Supreme Court case of Ritchie v. Rupe (2014). As many Texan business owners may know, the Ritchie Court substantially limited the available remedies to minority partners and shareholders by overturning Davis v. Sheerin (1988), while defined minority shareholder oppression in a relatively broad manner that was friendly toward minority shareholders.
If you are a minority partner or minority shareholder and were wrongfully denied dividends from the business or corporation, it is important to speak with an aggressive Dallas business law attorney about your claim as soon as possible. In the meantime, we will provide you with important additional information about the right to dividends and oppression.
Breach of Fiduciary Duty, Minority Shareholders, and the Right to Dividends Under Texas Law
When minority shareholders are being oppressed by majority shareholders, Texas common law may allow for those minority shareholders to challenge the actions of the majority shareholders according to a theory of the breach of fiduciary duty. What is a breach of fiduciary duty?
First, it is important to understand what we mean by fiduciary duty in order to understand how it can be breached. According to the Cornell Legal Information Institute (LII), a fiduciary duty is a high standard of care that is owed by the fiduciary to the principal or the beneficiary.
Directors of corporations have a fiduciary duty to shareholders. In many instances, according to the LII, the fiduciary duty has included a duty of care, a duty of loyalty, a duty of good faith, a duty of confidentiality, and a duty of disclosure.
While courts can make their own specific decisions about what is involved in a fiduciary duty, the LII notes that the general “business judgment rule” is one through which court presume “that in making a business decision the directors of a corporation acted in an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”
In other words, a fiduciary duty often means that a majority shareholder needs to act in good faith and in an informed manner in making decisions for the business. Failing to do so can be a breach of fiduciary duty. It is important to note, however, that under Texas law, the fiduciary duty extends to the corporation and not to an individual shareholder.
At the same time, there are several Texas cases in which the courts have concluded that the wrongful denial of dividends may constitute a breach of trust in a manner that evokes the breach of fiduciary duty. For example, in Patton v. Nicholas (1955), the Court of Appeals of Texas held that a majority shareholder’s refusal to pay dividends to two minority shareholders was unlawful.
The court clarified that the majority shareholder “wrongfully dominated and controlled the Board of Directors so as to prevent the declaration of dividends,” which it did “for the sole purpose of preventing [the minority shareholders] from sharing in the profits to be derived from the operation of the corporation.” The Patton Court described this as a “malicious suppression of dividends” that constituted a “breach of trust.”
But what constitutes a breach of trust? The court does not specifically clarify. And at the same time, defining a breach of trust to give a minority shareholder a remedy for the suppression of dividends may be moot in the wake if the Ritchie decision.
Complications of a Minority Shareholder’s Right to Dividends and Dividend Suppression Under Ritchie
As we mentioned, the Texas Supreme Court’s decision in Ritchie has made it more complicated and difficult for minority shareholders to have a remedy for oppression without the existence of a shareholder agreement. Under Davis, minority shareholder oppression was defined as one of the following:
- Majority shareholders’ conduct “substantially defeats the expectations that objectively viewed were both reasonable under the circumstances and were central to the minority shareholder’s decision to join the joint venture; or
- “Burdensome, harsh and wrongful conduct”; or
- “A lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members”; or
- “A visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.”
The Ritchie decision significantly limited the definition of oppressive conduct in such a way that is friendlier to majority shareholders, defining the conduct as a situation where the majority shareholders “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.”
What does this mean for the payment of wrongfully suppressed dividends, and treating that wrongful suppression as a form of minority shareholder oppression? In short, there are limited remedial options for minority shareholders.
The recent Texas Supreme Court case of Cardiac Perfusion Services, Inc. v. Hughes (2014) cited Ritchie and held that “a buy-out remedy was not available even when a majority shareholder had refused to pay dividends while overpaying himself, intentionally reduced the value of minority shares, and denied access to books and records,” according to an article in the Yale Law Journal.
Seek Advice from a Texas Business Law Attorney
If you have questions or concerns about minority shareholder rights when it comes to dividends and suppression, you should speak with a Texas business litigation attorney about your case. Contact Lindquist Wood Edwards LLP to learn more about the services we provide.